Federal and state government agencies are increasingly focusing on worker misclassification, including performing on-site audits of companies, to determine whether workers are properly classified as independent contractors, as opposed to employees.
Many states, including Pennsylvania and Wisconsin, have recently enacted worker misclassification laws that impose severe penalties on employers that misclassify employees as independent contractors.
If a worker is an employee, the employer must pay federal and state unemployment taxes, its share of Social Security and Medicare taxes, and the withholdings of the employee’s share of Social Security and Medicare taxes as well as income taxes. The employer also will incur costs related to pensions, health insurance, vacation pay, sick pay, and workers’ compensation insurance. In addition, employers face federal and state regulations regarding working conditions and overtime.
Given such employer obligations, ASA has received complaints from members about firms that improperly classify their workers as independent contractors. These firms can gain a competitive advantage by charging less for their services because they do not pay for workers’ compensation, unemployment insurance, or Social Security, and they do not withhold taxes from payments to those whom they misclassify as independent contractors and send on assignment.
The rules governing worker classification are complex and, at times, have led to confusion about how temporary or contract workers should be classified. Moreover, the economic downturn has increased pressure on staffing firms and clients to consider classifying temporary or contract workers as independent contractors. Staffing firms tempted to do so are well-advised to first make sure they are complying with federal and state law.
When the Internal Revenue Service investigates worker classification, it looks at the totality of the relationship between the business and the worker to determine, among other things, the amount of control the business has over the worker. Audits may include face-to-face interviews and close examination of the business’s tax return. If a business is found to have misclassified an employee as an independent contractor, the IRS will seek to collect delinquent employment taxes, and penalties may be imposed. Besides the IRS, worker misclassification can lead to other issues, including work authorization, overtime pay, benefits eligibility, workers’ compensation insurance, state unemployment insurance taxes, and violation of state worker misclassification laws. The entire process can be costly and burdensome for businesses.
At the 2011 ASA Staffing Law Conference, April 12–13 in Washington, DC, staffing industry attorneys and executives will address this thorny issue, and explain under what circumstances temporary or contract employees may be lawfully classified as independent contractors. For the full agenda and registration information, see americanstaffing.net/lawconference.