Misclassification a Huge Risk to U.S. Workers

Misclassification robs workers of important safeguards

Increasingly, employers throughout the United States are building their labor forces using independent contractors. Sometimes, however, workers are wrongly classified as independent contractors when they really should be treated as regular employees.

Whether this misclassification is accidental or intentional, it has the potential to harm employees. In addition, employers can face serious penalties for misclassifying their workers.

What is an independent contractor?

An independent contractor is a worker who is hired to achieve a specific goal or complete a specific project for the employer. The employer generally cannot direct how the contractor achieves these ends, except as laid out in a mutually-binding contract.

The line between contractor and employee isn't always clear. The Internal Revenue Service uses the following test to determine how a worker should be classified:

1) Does the company control the worker's behavior and/or how the worker does the job (e.g., by providing training)?

2) Does the company control the business aspects of the job?

3) Does the worker have the ability to realize a profit or loss, or is the worker simply working for wages?

4) What is the business relationship?

5) Are there contracts or benefits packages in place?

6) Will the worker continue on with the company after the project is over?

The Department of Labor uses a similar test to look at the economic relationship between the worker and the employer. The worker is likely an employee (and not an independent contractor) if he or she is economically dependent on the employer and performs duties as an employee would.

Why is misclassification a problem?

Workers who are misclassified as contractors miss out on many of the benefits that are available to workers in a traditional employer-employee relationship. For example, contractors are not entitled to overtime pay and not subject to minimum wage laws. They also often do not qualify for employer-sponsored benefits packages, or for government unemployment or disability benefits. Additionally, contractors have to pay for expenses (like gas, tools, and supplies) that would otherwise be covered by the employer.

Moreover, contractors pay higher taxes than employees do. This is because contractors are responsible for tax obligations that employers would otherwise pay. Indeed, many employers intentionally misclassify workers in order to save money on taxes and benefits.

What can misclassified workers do?

Workers who are wrongly classified as independent contractors have a right to take action against their employers. In some cases this is done individually, and, in other cases, as a class action lawsuit. These aggrieved workers can recover compensation, including unpaid overtime, benefits, and expenses.

As with any serious legal issue, if you think you have been misclassified as an independent contractor, your best course of action is to consult with an experienced employment law attorney. Together, you can work out a plan for moving forward that will be most beneficial to you.

The legal team at SFMS has substantial experience litigating employment matters. If you have any questions regarding this subject or this posting, please contact Chiharu Sekino (csekino@sfmslaw.com ) or Alec Berin (aberin@sfmslaw.com). We can also be reached toll-free at (866) 540-5505.

Shepherd, Finkelman, Miller & Shah, LLP, is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, Pennsylvania and Wisconsin. SFMS also maintains affiliate offices in England, and Milan, Italy, and is an active member of Integrated Advisory Group (www.iaginternational.org), which provides our firm with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please visit us at www.sfmslaw.com.