How The Independent Contractor Slowly Becomes Your Employee
By Lonnie Giamela Partner, Fisher & Phillips, LLP | November 18, 2012
Hoteliers often find it desirable to classify certain workers as independent contractors. Payroll tax benefits, labor cost reduction and business expense management are enticing for many companies to take the risk of classifying an individual as an independent contractor when the independent contractor/employee distinction is blurred. Employers that hire independent contractors must be extra cautious to ensure that these workers are classified correctly, because federal and state governments have signaled their intent to more seriously investigate misclassification issues. Employers that run afoul of the relevant statutes and regulations will face regulatory fines, back tax implications, wage and hour claims, workers' compensation issues and a host of other problems. The following article provides a background on what conditions must be satisfied to properly classify an individual as an independent contractor.
Hoteliers are always looking for ways to save money while maintaining productivity, especially in trying economic times. One way of achieving this has been for companies to hire independent contractors in lieu of employees. Businesses can reap several benefits, both financial and legal, from hiring properly classified independent contractors. On the one hand, they can avoid the financial burden of hiring employees, including employment taxes, worker's compensation insurance, Social Security and Medicare, and other withholding. Businesses who hire independent contractors also may not be subject to minimum wage, overtime and antidiscrimination laws. On the other hand, businesses that get this analysis wrong may be exposed to hefty fine, penalties, back taxes, and damages in employment lawsuits.
For various reasons, employers - especially those in the hotel industry - often find it desirable to classify certain workers as independent contractors, but employers need to know that enforcement agencies often look at classification decisions very closely. The government has a keen interest in ensuring that as many workers as possible are classified as employees - not only do such workers have greater employment law protection, but classification of workers as independent contractors deprives both the federal and state government of tax revenue, because they are not subject to payroll taxes.
One estimate revealed that the federal government lost an estimated $50.7 billion in tax revenue in the past 10 years due to such classification of workers. Moreover, organized labor has a vested interest in ensuring as many workers as possible are considered employees, because they are then potential union members. The revenue shortfalls at the state and federal levels during the past several years appear likely to continue for the foreseeable future, and governments continue to search for ways to compensate.
Governments likely will continue to crack down on worker misclassification. In the United States Department of Labor's ("DOL") 2011 budget it dedicated approximately $25 million to its initiative of investigating and correcting what it perceives as a problem of "employee misclassification," which means individuals classified as independent contractors who should have been classified as employees. In its 2012 budget, the DOL has nearly doubled the amount of money dedicated to this initiative, earmarking $46 million for it. Moreover, the heightened government attention to these issues likely will lead to more private civil lawsuits, because the damages available in such cases make them very attractive to plaintiffs' attorneys.
In light of these developments, there is a heightened importance of ensuring proper classification of individuals as independent contractors. It is far better to internally uncover and proactively address any potential misclassification issues, rather than learn initially of such issues when confronted by a governmental audit or a lawsuit. In reviewing whether someone is properly classified as an independent contractor, the following checklist can be used.