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Can You Afford To Misclassify Your Workers?

Independent contractor or employee – which is better, which do you have?  These are questions of fact and law.  Choose wrong and huge liability, even criminal penalties, may darken your door.  Using independent contractors may allow employers to decrease labor costs by 30% by avoiding employment taxes, workers’ compensation, sick leave, benefits and overtime. Also, independent contractors are not protected by Title VII of the Civil Rights Act, state human rights acts and most other employment laws. While classifying all your workers as independent contractors sounds like a great idea, it cannot be done unless the facts support it.  Wishing will not make it so. In fact, misclassification is rampant and it can cost employers thousands of dollars. Both federal and state governments are looking to ease their strained budgets by collecting unpaid taxes and benefits from employers who misclassify their workers as independent contractors. On the federal level, President Obama proposed a $25 million program to increase enforcement of independent contractor laws. Locally, Connecticut Attorney General Richard Blumenthal has joined in the hunt.

In the past year, Connecticut has significantly stepped up its enforcement of proper worker classifications.

  •  The Department of Labor’s Stop Work Unit issued 300 stop work orders for such misclassifications and issued 2 arrest warrants. These employers were forced to stop all business operations until the Labor Commissioner completed its investigation. A total of 1,200 workers were reclassified.
  • The State Unemployment Field Audit Unit reclassified 6,700 workers from independent contractors to employees. The audited employers owed $53 million in wages and $750,000 of additional unemployment tax.
  • The Department of Revenue Services conducted 61 audits between July 1, 2008 and June 30, 2009, and assessed $1.2 million in additional tax payments. Since then, 39 audits have been conducted and $780,219 additional taxes assessed.

Blumenthal wants to ramp up enforcement even further by increasing the penalty from $300 per violation to $300 per day per violation, and increase criminal sanctions. This could increase penalties from hundreds of dollars per violation to tens of thousands or more.  Needless to say, Blumenthal expects to generate significant revenue from this crackdown.

This increase in enforcement coincides with President Obama’s proposed $25 million federal program to increase enforcement of proper worker classifications. Last year, the federal government hired 250 additional wage and hour investigators whose sole purpose is to find violations like this. The President wants to add another 100 enforcement personnel to the Internal Revenue Service’s payroll to further strengthen his program. He predicts the program will make the federal government $7 billion over the next 10 years. In addition, the IRS has begun randomly auditing 6,000 companies nationwide.

If your company is audited, are you ready?  Have you made the best case you can given the realities of your business?  Do you know where you are vulnerable?  There is no bright-line test to confirm someone is an independent contractor but here are some questions you should consider:

  •  Are you asking the worker to do something central to your business?
  • What type of control do you have over the worker’s job functions?
  • Who decides how and when the worker does a project?
  • Do you provide the materials used to do the worker’s job?
  • Does the worker have to attend company meetings?
  • Do you provide benefits for this worker?
  • Do you pay the worker by the hour?
  • Do you ask the worker to prove that someone pays workers compensation and unemployment insurance on his/her behalf?

These questions are only the tip of the iceberg. 

If Connecticut does increase the penalty, you will pay $300 for each day you employ each misclassified worker, along with all back pay (including overtime) owed to the employee and any back taxes owed to the state. In addition, you will open yourself up to civil and class action lawsuits by workers who are wrongly classified. Before you are audited by the government, you need to audit yourself, determine if you have weaknesses and what can be done to minimize the likelihood that you will join the thousands of employers found to misclassify their employees.