The issue of whether independent contractors are really employees is being examined in courts across the country. The most recent FedEx decisions in Kansas, Oregon, and California have illustrated just how widespread this issue has become. Many small employers think they can fly under the radar and that enforcement efforts are only targeting large employers. I wish it weren’t so, but that is not the case. MSEC regularly sees small employers, non-profits, and sole proprietors facing the same problem: Is my worker an employee or independent contractor? It has been my experience, that if you issue a 1099 to a single person, rather than to a business, that person is more than likely to be seen as an employee to whatever agency is deciding the issue. Regardless of any contract or agreement with a worker that they are a contractor and not an employee, that relationship will be examined under the laws that define employees.
Employers can run into this issue in a number of ways. A non-profit that receives a grant to hire workers to perform the work of the grant may want to classify those workers as independent contractors to best match grant funding. But, if the worker does not meet the requirements of the law, summarized here, the worker will be considered an employee. For instance, a company needs someone to clean their offices. An employee offers to do this in the evenings, and is paid on a 1099 for the cleaning work and as an employee for the day job. Unless the employee has their own business cleaning offices for other companies, paying them under a 1099 for the night cleaning will not be consistent with the law, and the employer will likely owe unemployment insurance taxes, FICA taxes, among other potential liabilities. Anytime you write a check or issue a 1099, there is potential liability and that relationship should be examined.
The industry standard may lead companies to believe that workers are hired as independent contractors. Construction, plumbing, consulting, and some other industries don’t hire employees; they hire contractors when they need help. While that may be the industry standard, the law does not take this into account. Unless the worker has their own business as a construction contractor, plumber, consultant, or other professional designation, the worker will likely be considered an employee.
Employers find out that there is a problem when the independent contractor stops working for the company. That contractor may go file for unemployment, which triggers the state department of labor to investigate the relationship between the company and the worker. Nine times out of ten, the worker is considered an employee. If there is a business to business relationship, then there is less risk of misclassification. But, if the company engages a sole proprietor to do work on behalf of the company, most state and federal agencies will assume that the sole proprietor is an employee.
If you are wondering whether someone working for you is really an employee, give MSEC a call. We can help you analyze this in light of the law that governs this difficult issue.