DISCLAIMER: This post provides general information about workers compensation penalties. It does not contain legal advice. After you self-audit your worker classifications, we recommend you consult an employment attorney in the jurisdiction(s) where your employees work.
Approximately 1.2 million New York workers filed claims for unemployment or wage loss replacement benefits as a result of the coronavirus pandemic. In September 2021, an estimated 800,000 workers were still receiving benefits amounting to $463 million dollars per week! It’s going to be awhile before enough tax money comes in to cover those costs.
Early in the pandemic and among other ideas, the United States Congress proposed a “crackdown on worker misclassification” to:
- ensure essential workers were fairly paid
- reduce the risk of businesses misusing economic assistance
- recoup some of the costs of that assistance
New York has a long history of successfully recovering unpaid payroll tax, penalty, and interest payments that cover the costs of unemployment insurance (UI) benefits. The Department of Labor (DOL) computer systems can also cross-reference information employers file with the Workers Compensation Board (WCB) and Department of Taxation and Finance. This often results in additional penalties for failure to insure employee illnesses or injuries, as well as errors on income tax returns.
If you have employees working in New York, you need to know how to:
- Reconcile inconsistencies among the independent contractor criteria considered by three key government agencies
- Gather evidence to support your arguments that workers are truly independent contractors
- Recognize when you might need a lawyer to help you sort things out
How the IRS Determines Who Is an Independent Contractor
The IRS is still mostly concerned with financial and behavioral control. Workers are usually independent contractors if they have a significant investment in the means of providing the services and they control how the work will be performed. The more you try to control the worker, the more likely they will be considered your employee. Even well-intended gestures, such as providing insurance or some reimbursements could call the relationship into question. A written agreement will not always help. The IRS has discretion to consider the function of the relationship over the form.
The independent contractor relationship is different from the one you have with your employees. You can tell employees what time to report to work, where to report, how to dress (to some extent), which tools or equipment to use, and how their performance will be evaluated. They might use your equipment, premises, business cards with your logo, or email addresses at your domain address. Their employment can be terminated for any reason that is not discriminatory or otherwise illegal.
An independent contractor will probably negotiate payment terms for ending the agreement. They will also use their own equipment, set their own schedules, and prioritize work according to their business priorities.
How the NYS DOL Determines Who Is an Independent Contractor
The NYS DOL considerations have become more consistent with the IRS criteria in recent years. Unskilled or casual workers are usually employees because their labor is often supervised. However, even professionals such as doctors and lawyers, who have much freedom to perform their duties, may be employees if they are subject to significant control.
The courts have also found that workers may be employees and that an employment relationship may exist if the employer controls important aspects of the services performed, other than results and means.
Although the Construction Industry Fair Play Act applies only to construction workers, it provides criteria that can help you consider whether your worker is truly independent. One easy way to check your classifications is to ask yourself, “Does the worker represent an independent business with a contract?” There is a 12-point test, and the independent contractor must satisfy all 12 to be considered a separate business.
Here are the other considerations:
- Is the worker free from your control and direction in performing the job, both under contract and in fact?
- Is the worker performing services outside of the usual course of business for your company?
- Is the worker engaged in an independently established trade, occupation, or business that is similar to the service(s) they perform for you?
How the NYS WCB Determines Who Is an Independent Contractor
The most common defense to the employment relationship in a WC claim is the assertion that the claimant was an independent contractor. Employers have attempted to create this relationship with contracts conceding such an arrangement, but the Board has the discretion to find an employer-employee relationship where the substance of the relationship is more similar to employment. The form (or the contract) is not controlling. See Dodd v. North Patchogue Fire District, 286 A.D. 904, 142 N.Y.S.2d 153 (1955).
Instead, the Board will consider factors such as:
- Whether the alleged employer has the right to control the claimant’s hours of work, the work he accepts and his performance of the work
- How the claimant is paid (e.g., check, cash, minus sums withheld for taxes)
- Who has the right to terminate the relationship
E.g., Klein v. Sunrise Bldg. Co., 7 A.D.2d 805, 180 N.Y.S.2d 885 (3d Dep’t 1958), appeal denied 5 N.Y.2d 711, 184 N.Y.S.2d 1025, 157 N.E.2d 511.
Relationships Can Be Imputed
Because judges have broad discretion to impute the employment relationship on businesses that subcontract work to unincorporated businesses, it might be best to follow the guidelines of the DOL’s Construction Industry Fair Play Act above.
The Presumptions Favor the Claimant
When in doubt, assume the worker will be deemed your employee and take action accordingly.
Resources and Tools Are Available to Protect You
In addition to attorneys and accountants, you can insulate yourself from some liability through insurance.
- General Business Liability Policy
- Employers’ Liability Policy
- Workers’ Compensation Policy
- Disability and Paid Family Leave Policy
- Unemployment Documentation