DISCLAIMER: This post provides a general overview of employment conflicts that might arise when working with independent contractors. It is not legal advice. 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. Don’t rely solely on what you read on the Internet. Ever.
Independent contractors are not employees. They are self-employed individuals who provide services to businesses on a contract basis. However, the line between independent contractors and employees can be blurry, and misclassifying a worker can have serious consequences for businesses.
The Dangers of Misclassifying Workers
In New York, the Workers’ Compensation Board and the Department of Labor have the authority to determine whether a worker is an employee or an independent contractor. The factors they consider include:
- The degree of control the client exercises over the worker
- The worker’s opportunity for profit or loss from providing services to clients
- How much the worker has invested in the business (e.g., advertising, business cards, equipment, licenses, supplies, vehicles, website)
If the WCB or DOL determines that a worker has been misclassified, the client business is deemed the employer and could be liable for:
- Back wages
- Overtime pay
- Payroll taxes and withholdings
- Safe and Sick Leave pay
- Workers compensation, disability, and Paid Family Leave benefits
- Fines, penalties, and interest
Gig Worker Is Not a Legal Classification
The WCB or DOL has the power to decide who is an employee, even if you and the worker both want an independent relationship. Your contract is not controlling and can be ignored. You might know them as:
- Freelancers
- Gig workers
- Independent agents
- Independent contractors
- Permalancers
- Subcontractors
- Vendors
Call them what you like. If they you are issuing 1099-NEC forms with their social security numbers instead of employer identification numbers, you might be an employer instead of a client.
Events That Might Cause a Worker Classification Inquiry or Audit
There are a number of events that can trigger a WCB or DOL inquiry into whether a worker has been misclassified. These include:
- A new business entity registers for an employer identification number, even if the intent is only to pay the sole shareholder a salary.
- An independent contractor begins to work beyond the scope of the original project, quits, and files for unemployment insurance benefits, listing clients as employers to maximize the amount of benefits payable.
- An outside sales representative is involved in an accident while going to or from a sales meeting and files an injury claim.
- The income tax return for a business with high income and no employees reports a substantial deduction for outside labor.
- A freelancer files a claim under the Freelance Isn’t Free Act.