DISCLAIMER: This post provides general information about worker misclassification. It does not contain legal advice. If you are building your business with independent contractors, we recommend you consult an employment attorney in the jurisdiction(s) where the contractors will perform the services.
The Bureau of Labor Statistics and several state task forces previously reported that at least 10 to 30 percent of all workers were misclassified. As many as 95% of workers are re-classified after reviewed by a governmental agency.
It’s far better for you to self-audit your worker classifications before the State does it for you. It can cause tremendous anxiety to get that notice of a penalty that has accumulated to $16,000.00 or more. That is usually the minimum amount we see when clients first come to us for help resolving workers compensation penalties.
What is worker misclassification?
Worker misclassification is the practice of hiring workers as independent contractors when they are actually employees. This can have a number of negative consequences for both the employer and the worker.
As explained by the New York State Department of Labor, some employers classify employees as independent contractors to avoid paying:
- Payroll taxes that pay for unemployment insurance
- Workers’ Compensation, disability, and Paid Family Leave premiums
- Social Security and other payroll tax withholdings
- Minimum wage and overtime earnings
- Safe and Sick Leave Pay
These practices attempt to rob employees of their legal protections, and they disadvantage businesses that comply with the laws. Employers who fail to provide these benefits are subject to penalties, and their owners and officers could be personally liable for the expenses related to claims that could have been covered by the mandatory insurance policies.
How do the WCB and DOL search for misclassified workers?
Audits
Federal and state laws require employers to maintain accurate records related to employees, their payroll, and other aspects of the business. These give state agencies authority to inspect the records at any time. These can be scheduled randomly or when the agency suspects you are not in compliance. Often, those suspicions arise out of claims or anonymous tips.
Claim Investigations
A claim for workers’ compensation, disability, Paid Family Leave, or unemployment insurance benefits will open an investigation. During that investigation, the respective state agency will typically check a worker’s classification when evaluating eligibility. Denying an employment relationship, even when you have a contract agreeing to an independent arrangement, might not be enough to avoid it being imputed on you.
Anonymous Tip Investigations
Employees and their loved ones have many ways to learn about their rights, and they are exercising them. If a state agency receives a credible tip regarding fraud or other misconduct, it will investigate to ensure government benefits are only awarded to eligible applicants. The agency must also collect the taxes that pay for those benefits.
Three Worker Misclassification Nightmares
Owners and officers of employer entities are frequently surprised to learn that they can be personally liable for the business’ failure to provide workers’ compensation insurance, disability, and Paid Family Leave insurance for their employees. This includes employees who have been misclassified as independent contractors. Below are three examples of cases that did not end well for the business owners.
Uninsured, Unincorporated Subcontractor without Work Authorization
When they couldn’t handle all the work clients hired them for, Addison subcontracted work to a competitor who worked in the same geographical area. Addison was the owner of a single-shareholder landscaping corporation with Subchapter S tax treatment (S-Corp). Unknown to Addison, the subcontractor was an uninsured, unincorporated subcontractor authorization to work in the United States. He also had a pre-existing back injury.
After several disagreements about the work, the subcontractor filed a workers’ compensation claim alleging he re-injured his back while working on Addison’s job sites. Believing their personal health insurance policy was all they needed, Addison’s S-Corp had no insurance to cover the cost of the claim or their defense. They were on a four-year payment plan with the Board at the time they died. It took another two years to pay the attorneys’ fees.
Unintentional Employee of a Client
After losing a full-time magazine job, Jean mistakenly entered his freelance earnings on his UI benefits application. The review of the UI application resulted in an inquiry to one of his occasional publishing clients. The client denied there was an employment relationship, which is when Jean realized what he had done. He withdrew his 1099 earnings from his claim, but the DOL scheduled a hearing. A judge found the freelance publishing jobs were employment because of their frequency. Also, Jean had often run errands for the client that were outside the scope of the publishing projects.
Jean was mortified to learn that his client-turned-employer was audited by the DOL, and penalties were assessed—with interest. The DOL audit triggered a WCB audit, penalties, and additional interest because the client did not have WC, DB, or PFL insurance for him. Jean and his client genuinely thought he was independent and responsible for his own insurance, but the State disagreed.
The client paid the penalties and interest, then closed the business and moved out of the country. When I last heard from him, Jean was still looking for steady work.
Independent Contractor Needing Paid Time Off (Part One)
Finn was a savvy independent contractor whose spouse got COVID in the early days, before the vaccine. Her spouse was very ill and required a lot of care, leaving Finn without sufficient time to do her work. She needed a plan to keep money coming in, regardless of the number of hours she could put in.
For hours, she conducted research on the Internet. She also discussed her challenges with friends who had jobs, one who was a lawyer, and a couple who had filed successful claims for Paid Family Leave.
She asked her only client for PFL information so she could apply. The client wanted to help Finn yet explained that PFL wasn’t available because the she was not an employee.
Independent Contractor Needing Paid Time Off (Part Two)
At first, Finn accepted this explanation, but her spouse’s condition did not improve as quickly as she hoped. In her desperation, she went back online and eventually found information on the WCB website that made her wonder if her client was correct. She learned that the Board administers PFL and other DB claims, in addition to WC claims, so she decided to call for help determining her options.
After discussing the work she did for her only client, the WCB suggested Finn was not an independent contractor. Believing she was a misclassified employee, the Board opened an investigation and sent the client a notice requesting WC and DB policy information. Fortunately, the client had secured both of those policies to cover its key employees, so there was only a slight premium adjustment for the misclassification–at least where the carriers were concerned.
The Board was not as forgiving. The client didn’t have a PFL waiver on file for Finn and was penalized for her, as well as all “similarly situated” contractors. Anyone who was unincorporated, working for the client regularly, and performing duties similar to the client’s employees was deemed an employee.
The WCB’s actions also triggered DOL investigations to ensure the client had paid appropriate payroll taxes for UI, and the client was audited for sexual harassment training compliance. All the penalties came out of the owner’s pocket because the business didn’t have the funds to pay them. The client business soon closed, leaving Finn unemployed and with a business clients were afraid to engage.
Ready to Check Your Work?
Self-Audit Your Worker Classifications Before the State Does It for You