DISCLAIMER: This post contains a general overview of worker misclassification. It is not legal advice, and we am not your attorneys. If you require information or advice applied to your unique situation, please make an appointment to discuss it with an attorney experienced with the subject matter.
We cringe when we read articles that encourage small business owners to use independent contractors instead of employees when building their new businesses. It’s not that independent contractors are generally a bad idea. Over the past 20 years in this business, we’ve worked with many contractors who have skills we do not.
From building a website to designing a book cover, we’ve had the pleasure of working with some exceptional professionals. They delivered specific projects, usually on short-term bases.
We’ve worked with some contractors for longer periods, but we made certain the contracts specifically outlined the deliverables they would produce. For example, they curated content on this blog, while also working with other clients on similar writing or marketing projects.
If we needed ongoing administrative support, we hired an agency that considered the virtual assistants their employees. They then loaned the VAs to me. Otherwise, we made those VAs our employees and incorporated them into our team. We know how easy it is to get penalized for misclassifying workers in New York.
Do the Math
Many employers go without workers compensation, disability, Paid Family Leave, and unemployment insurance. They often surprised to learn how affordable it is to be in compliance. This is especially true in comparison to the penalties that can accumulate. The Workers Compensation Board has the discretion to calculate penalties at a rate of $2,000.00 for every 10-day period of non-compliance. The insurance premiums could be as low as $1,000.00 per year.
A cost-benefit analysis makes it easy to see that the insurance is a good investment to avoid a $12,000.00 penalty. That’s how much it could cost you for having an uninsured employee for 60 days. It is rare that we see penalties less than this amount, and we’ve seen them as high as $500,000.00.
What is Worker Misclassification?
Worker misclassification occurs when an employer treats an employee as an independent contractor in order to avoid paying certain taxes and benefits. These can include:
- Payroll tax withholdings for Social Security and unemployment insurance
- Mandatory workers compensation, disability, and Paid Family Leave insurance
- Safe and Sick Leave pay
- Retirement plans
Why is Worker Misclassification a Problem?
Worker misclassification can lead to unfair competition for businesses in the same industry. Those that misclassify their workers might save money on taxes and benefits, which gives them an unfair advantage over competitors that follow the law.
This unfair competition can also harm workers. Employees who are misclassified as independent contractors are often paid less and deprived of overtime wages, breaks, and other benefits and protections.
Make Sure You’re Consulting the Right Expert
We assume the publications and organizations encouraging the use of independent contractors are well-intended. They are trying to help businesses preserve the funds they need to grow. Yet they either don’t know or can’t sufficiently explain the very detailed criteria for properly classifying workers. This gets far too many small business owners in deep financial trouble.
Too often, the money these employers think they saved on WC, DB, PFL, and UI benefits get paid instead to the Department of Labor, Department of Taxation and Finance, or the Workers Compensation Board.
Key Considerations
Regardless of whether you are using a service to help you find your independent contractors, you must do your own due diligence.
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- It is not the number of days worked that makes a worker independent. A worker can have a full-time job in addition to the casual work she does in your business, and she can still be deemed your employee.
- The number of hours worked does not determine the classification. A bookkeeper who only works for you three hours per week could be deemed your employee. Actors on set for one day can be employees of the production company. Even the day laborer whose full name you don’t know might be your employee for the few hours he worked on the day you were short-handed.
- The type of work you and the worker is a significant consideration. If you’re a web design company and you hire freelance web designers, they are probably your employees. Similarly, VAs who do basic administrative tasks on a weekly or monthly basis are likely your employees.
- There are exceptions. If the friend you hired owns a business that provides the same services to others as those he provided to you, he is probably your vendor, not your employee. The web designer who has an established design firm with many other clients might be a true independent contractor. The VA might be an employee of the service you contracted with.
- You cannot rely solely on your independent contractor agreement. Some courts might reject your agreement, even if both parties want the independence. You need to know the employment laws of each state in which you have workers. This is why most businesses consult an employment attorney before they start hiring.
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