Frankfurt Kurnit Klein & Selz

February 23rd, 2010

Employee or Independent Contractor: Are You Classifying Employees Correctly?

Employee "misclassification" is in the news and on the radar of law enforcement agencies. As the New York Times recently reported, federal and state officials are increasing their focus on businesses that "misclassify" employees as "independent contractors" (aka freelancers). In New York, investigations have revealed more than 12,000 instances of misclassification resulting in millions of dollars of tax assessments, fraud penalties, and fines, according to a government task force report. In a time of steep budget deficits, these investigations are an attempt to ensure that all businesses pay their fair share of social security, medicare, unemployment insurance, and workers compensation. Because improper classification can lead to significant financial, civil, or even criminal liability, it’s important to understand the difference between an employee and an independent contractor. Here’s what you need to know.

What is Employee Misclassification?

In a nutshell, employee misclassification occurs when an employer deems a worker an "independent contractor" when that worker should have instead been classified as an "employee." The difference is important: workers deemed "employees" under state and federal law enjoy a wide range of legal rights. These rights include eligibility for unemployment insurance, workers compensation, minimum wages, overtime, and other benefits.

Investigations

New York recently formed a Joint Enforcement Task Force on Employee Misclassification. The Task Force comprises a number of agencies including the State Attorney General’s Office, the Department of Labor, and the Department of Taxation and Finance. As a result of nearly 2000 "hot line" calls and other tips, the Task Force has undertaken 46 "sweeps" leading to hundreds of investigations and audits of businesses in a variety of industries. The federal government is also hiring 100 more enforcement personnel, according to the New York Times article.

Who is an Independent Contractor?

Courts and government agencies look at a number of factors to determine whether an employer has classified an employee properly. In general, the classification analysis focuses on the degree of supervision, direction, and control exerted by the employer. Put another way, you are an employer if you control what will be done, how it will be done, and when it will be done. Factors indicating control may include:

• determining when, where and how services will be performed
• providing facilities, equipment, tools and supplies
• directly supervising the services
• stipulating hours of work
• requiring that services be exclusive
• setting the rate of pay
• requiring attendance at meetings and/or training sessions
• requiring oral or written reports
• reserving the right to review and approve the work product
• evaluating job performance
• requiring prior permission for absences
• reserving the right to terminate the services

What Can Happen If a Worker is Improperly Classified?

If you improperly classify an employee as an independent contractor, you can be liable for:

• additional state and federal income taxes
• unemployment insurance penalties
• workers compensation penalties
• lawsuits by workers for unpaid wages
• criminal fraud

Conclusion

In the current enforcement environment, proper classification of workers presents both fiscal and legal challenges. But there are accounting and billing systems, procedures, and other steps you can take to help ensure your relationships with independent contractors comply with state and federal law. Your attorney can help you apply the factors above to particular workers and groups of workers, and give advice on structuring these relationships. If you have any questions about worker classification, or other employment law issues, contact Wendy Stryker at (212) 705 4838 or wstryker@fkks.com, or any other member of the Frankfurt Kurnit Executive Compensation & Employment Group.

Disclaimer. This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.