In hard economic times, some employers might be tempted to mis-classify an employee as an independent contractor (IC). The advantages are obvious: no payroll taxes, no other fringes, and no overtime pay. Job seekers themselves might be similarly tempted. From their perspective, with no taxes withheld, they get much more take-home pay, which might help them get back on their feet more quickly.
There are serious consequences, though, for both parties. Penalties an employer may face include a thorough audit and reimbursement of any wages and overtime due, as well as payment of all taxes due, plus penalties. Any workers’ compensation or unemployment insurance benefits due must generally be paid from the employer’s funds. Employers with a pattern of similar abuses may also face criminal charges.
Applicants who accept such offers also face consequences. Although no income taxes are withheld from their pay, they must still pay them, as well as Social Security and Medicare taxes. ICs, legally self-employed, must also pay the employer’s share of those taxes when they file their annual tax return.
So what constitutes an “employee?” Think “control” – the more control the employer has, the more likely it’s an employee’s job, and not an IC’s. Pretty much everything about an employee’s job is determined by the employer: where the job is done, how it’s done, the hours during which it’s done, etc. Employees are also subject to the provisions of the Fair Labor Standards Act (FLSA), which includes eligibility both for the minimum wage and for overtime pay.
Real ICs, on the other hand, aren’t subject to FLSA, but otherwise have a great deal of flexibility. They have an agreement with the employer to do a particular job, and generally work without supervision or control. They set their own hours and in many cases don’t need to work be at the employer’s workplace. Finally, ICs generally cannot be discharged early – before the expiration of their contract – unless there’s a breach of contract. Examples of legitimate IC jobs are freelancers contracted to do specific projects; in addition, lawyers and accountants are also often hired on an IC basis.
If you’re currently working as an independent contractor, make certain you haven’t been mis-classified, because that can cost a great deal of money. Check these government sites for more detailed explanations and standards:
If you are mis-classified, you’re in a sticky situation. If you complain, you’ll likely be fired outright; if you don’t complain, you’re letting the employer exploit you. The best advice I can offer is to talk to a lawyer for advice about your specific situation.
And if you’re job hunting and you’re offered you an employee’s job with an IC classification, your response should be “I’d love to work here, but that’s an employee’s position under the law, and I don’t want to get you in trouble by letting myself be mis-classified.”
Dale’s been involved in human resources for over 20 years, first as a shop steward and then in different management capacities.