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October 3rd, 2003
Be Wary of Freelance ‘Solution’
During the 1990's, the New York Dept. of Labor audited many ad agencies and related businesses and forced many of them to re-classify some freelancers as employees. Litigation was used with some firms.
The state wants individuals to be covered by unemployment and health insurance so they won't become a burden to the state.
The high cost of health insurance is putting increased pressure on firms to avoid paying such costs for workers. Family plans offered in a group can cost $15,000 to $20,000 and more yearly and $5,000 and more for a single person.
Freelancers who must take out their own policies also face escalating costs. New York area HMOs have been boosting their individual rates by double digits for years. The most expensive plans in New York are offered by United Healthcare of New York. Its family plan (for an individual subscriber) is $3,375 monthly or $40,500 a year. Individuals would pay $1,125 monthly or $13,500 yearly.
Because of recent clarifictions in the law, a freelancer can now deduct the entire cost of a health plan from income. Previously, health plan expenses could only be deducted if total medical expenses exceeded 7.5% of the taxpayer's income.
Freelancers like the fact that taxes are not immediately withheld from their checks and they also have the opportunity to write off many expenses as related to business.
Employers, meanwhile, like freelancers because they don't have to pay their health and other benefits.
While there is no legal requirement for a business to provide health insurance, most employers of any size have some sort of plan for "full-time employees," usually defined as those working 30 or more hours a week. Dependents are usually covered.
The problem with the "freelance solution" is that many workers can no longer afford to pay for their own plans and employers risk reclassification of the freelancers as employees.
The IRS has a "20 Factor" test to determine if someone is an employee or independent contractor.
Factors indicating employee status are:
The employer provides instruction and training on how to do the job; the individual is integrated into the services which the employer is providing (part of the business's products or services); the services must be rendered personally by the freelancer; the relationship is ongoing (long term); the individual is required to work specified hours at the employer's facilities, and the fee is paid by the hour, week or month.
Indications of independent status include:
The person works for more than one firm at a time; makes his or her services available to third parties (having business cards helps establish this); the person uses his or her own tools or equipment, and the person is paid by the job and has a risk of loss or gain.
The tests are applied based on all of the facts and circumstances and no one factor is necessarily decisive. A carefull analysis should be done to classify each position correctly. Also, keep in mind that in any governmental challenge, the government is biased towards classifying workers as employees for the policy reasons discussed above.
A PR firm that mistakenly classifies an individual as an independent contractor risks a New York State or Federal Government challenge that could involve back payment of unemployment insurance, taxes, FICA payments, as well as interest and penalties. The obligations on each incorrectly classified individual plus accrued interest and penalties can be substantial.
If years of mis-classification are involved, the back payments and liabilities could jeopardize a company's viability. In a few instances, workers themselves have successfully sued for employment benefits.
While a PR firm could benefit from the cost-savings of treating workers as freelancers, provided it can still attract quality talent, the firm runs significant long-term risks if freelancer classifications are disallowed.
Author: Gavin McElroy
This article first appeared in the October 3, 2006 edition of the legal column in www.odwyerpr.com.
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