U.S. cracks down on companies that call employees 'contractors'

U.S.-cracks-down-on-companies-that-call-employees-contractorsThe federal government is cracking down on businesses that call people "independent contractors" when they're really entitled to be treated as employees.

If someone is called a contractor when they're actually entitled to be treated as an employee, the person may be entitled to reimbursement for unpaid wages and many benefits they would otherwise have received.

Both the U.S. Department of Labor and the IRS are stepping up their auditing and enforcement efforts. The IRS has begun a three-year initiative to investigate thousands of employers, large and small, and nail those who are misclassifying their workers.

Many state governments are also beefing up their enforcement efforts.

If you're a worker who's considered a contractor, but you function more like an employee – or if you're an employer and there's a possibility that you've been misclassifying your workers – you should speak to an attorney.

It's not always precisely clear what the difference is between a contractor and an employee. The IRS uses a 20-part test that focuses primarily on how much control the employer has over how the work is performed and how the person gets paid.

But there are some "red flags" that suggest that a so-called contractor is really an employee. For instance, workers might be entitled to be treated as employees if:

  • They have worked for the business steadily for a long period of time;
  • They have full-time workloads for the business;
  • They don't take on work for any other employer;
  • They perform a core function for the business, as opposed to a secondary function that would typically be outsourced; or
  • They perform essentially the same work as other people who are treated as employees.

Some employers misclassify their workers because they simply don't understand the difference between an employee and a contractor. But others do so in order to save money – by classifying a worker as a contractor, they avoid their obligations regarding wage and overtime laws, payroll taxes, Social Security, unemployment and workers' compensation – not to mention health and retirement benefits and time off under the Family and Medical Leave Act.

The penalties for misclassifying workers can be significant. The IRS can issue fines of up to $5,000 per worker, and state governments can impose additional penalties. Plus, misclassified workers can seek reimbursement for wages and benefits.