Is a worker an employee or an independent contractor? You may think this is a silly question, but it is not. Independent contractor classification is popular among employers looking to save a few bucks. By classifying an employee as an independent contractor, an employer does not have to abide by minimum wage or overtime laws. They also save on payroll taxes and benefits.
As you can see, taking all these costs together, classifying a worker as an independent contractor can mean big savings for employers. However, it could also mean huge problems if the worker is misclassified. Employers who misclassify workers as independent contractors can face fines and lawsuits. The IRS can levy a variety of fines for employee misclassification. Fines start at $50 per unfiled W-2, plus an additional fine of 1.5% of the wages paid. FICA taxes for both employer and employee will also be levied. State governments can also issue their own fines for misclassifying workers. And those are just the fines from the IRS. The Department of Labor can also issue back pay orders and penalties.
Therefore, it is important that employers know the rules when it comes to classifying employees. It is also important for employees to know their legal rights.
Employee vs. Independent Contractor
Employees and independent contractors differ in several ways, including control, duties, schedules, and tools/equipment ownership. It is important for employers and employees to know these differences. They include:
- An employee will receive instructions about how to perform the work, while the independent contractor generally performs the job their way and is only given the end result to be achieved.
- Independent contractors generally do not need training and already have the skills to perform the tasks at hand, while employees often receive training.
- Set hours. Employees generally work set hours and the same schedule daily, while independent contractors work the hours they choose. It may be a varying schedule every day.
- Hiring and supervising. Companies will hire their own helpers. They will not make employees pay for additional help. On the other hand, independent contractors generally have to secure and pay for additional help if needed.
- Continuing relationship. Employees will continue working for the same employer until the relationship is ended by one party or the other. Conversely, a contractor will typically perform a specific job of limited duration with no continuing relationship.
- Payment for employees is typically done on an hourly or salary basis, while independent contractors are generally paid by the job or project.
- Employees are furnished their tools and equipment by their employer, while independent contractors pay for their own tools and equipment.
Damages for Misclassification of Independent Contractors
As a business owner, if you are unsure of the classification, it’s probably best to take the conservative route and classify the worker as an employee.
Misclassified employees can file a civil lawsuit under federal law or file a complaint with the Department of Labor or the Texas Workforce Commission. In these cases, a court or the relevant government agency determines if an employee has been misclassified as an independent contractor and what back pay and/or penalties are owed.
For example, if a misclassified employee worked more than 40 hours in any workweek, the worker may have a claim for unpaid overtime. Conversely, if the worker is salaried and no longer being paid overtime as before, they may be entitled to compensation.
If a misclassified employee suffers a workplace injury, he or she may be eligible to receive workers’ compensation if the employer is a subscriber. If an employee who was misclassified as a contractor is let go, he or she may also qualify for unemployment benefits.
Contact Our Frisco Employment Law Attorneys Today
Misclassification of a worker can result in fines and additional taxes and interest levied on the business. It can also result in a lawsuit from the affected employee.
Simon | Paschal PLLC can explain the laws involved with worker classification and help you avoid liability and fines. Contact us online today or call (972) 893-9340 to schedule a consultation.