Misclassifying Employees as Independent Contractors Just Became Much Riskier

04/01/2016 / John Kvinge

Last year, the United States Department of Labor (DOL) announced that it was increasing its enforcement activities regarding misclassification of employees as independent contractors. Minnesota construction companies that have misclassified their employees might now be forced to pay back wages (including any overtime pay), additional taxes, and other penalties as a result of the misclassification. Any business that regularly pays individuals as independent contractors should carefully examine the nature of the working relationship, and ensure that proper classifications are made going forward.

Generally speaking, workers in the United States can be placed in two broad categories: employees and independent contractors. Employees are entitled to additional protections under the law, including the opportunity to earn overtime wages, receive unemployment and workers’ compensation benefits, and take family and medical leave. Independent contractors are not automatically entitled to the same benefits, but may have more flexibility in when and how they work, or receive higher pay to account for the savings in employer-paid taxes.

Many employers mistakenly believe that they can reach an agreement with a worker to be classified as an independent contractor, rather than an employee. In fact, the law requires certain factors to be present before a worker can be properly classified as an independent contractor. Though no single factor is determinative, they include:
·         The extent to which the work performed is an integral part of the employer’s business;
If so, the worker is more likely to be classified as an employee.
·         The worker’s opportunity for profit or loss depending on his or her managerial skills;
If the worker is paid a set fee and has the opportunity to come out ahead or behind depending on how he or she chooses to accomplish the task, they are more likely to be classified as an independent contractor. Hourly workers may still have an opportunity for profit or loss if they purchase their own supplies or locate their own jobs, and have a similar chance of risk or reward.
·         The extent of the relative investments of the employer and the worker;
If the employer provides most of the tools and equipment required to complete the job, the worker is more likely to be classified as an employee. Significant worker investments in special equipment, tools, and office or storage space can indicate that the worker is an independent contractor.
·         Whether the work performed requires special skills and initiative;
A worker performing assembly line work is more likely an employee than an independent contractor. A carpenter that is asked to build cabinetry and determines the method and materials to use is more likely an independent contractor.
·         The permanency of the relationship; and
A worker that is hired on an indefinite basis, instead of for a single project, is more likely to be classified as an employee.
·         The degree of control exercised or retained by the employer.
The greater the control the employer has over the location, timing, and methods of the worker’s efforts, the more likely the worker will be classified as an employee.

Companies should secure legal advice regarding their classification of any individuals as independent contractors to help navigate the related, legal minefields.