Feds crack down on companies that call employees ‘contractors’

The federal government is cracking down on businesses that call people “independent contractors” when they’re really entitled to be treated as employees.

In particular, the U.S. Department of Labor and the IRS are stepping up their auditing and enforcement efforts. The IRS has begun a three-year auditing initiative to investigate as many as 6,000 employers, large and small, and nail those who are misclassifying their workers.

Many state governments are also beefing up their enforcement efforts.

If you’re an employer and there’s a possibility that you’ve been misclassifying your workers – or if you’re a worker who’s considered a contractor, but you function more like an employee – you should speak to an attorney.

It’s not always precisely clear what the difference is between a contractor and an employee. The IRS uses a 20-part test that focuses primarily on how much control the employer has over various aspects of how the work is performed and compensated.

But there are some “red flags” that will make the government suspicious. For instance, the IRS might think workers are entitled to be treated as employees if:

  • They have worked for the business steadily for a long period of time;
  • They have full-time workloads for the business;
  • They don’t take on any work for any other employer;
  • They perform a core function for the business, as opposed to a secondary function that would typically be outsourced; or
  • They perform essentially the same work as other people who are treated as employees.

Some employers misclassify their workers because they simply don’t understand the difference between an employee and a contractor. But others do so in order to save money: By classifying a worker as a contractor, they avoid their obligations regarding wage and overtime laws, payroll taxes, Social Security, unemployment and workers’ compensation – not to mention health and retirement benefits and time off under the Family and Medical Leave Act.

The penalties for misclassifying workers can be significant. The IRS can issue fines of up to $5,000 per worker, and state governments can impose additional penalties on top of that. Plus, misclassified workers can seek reimbursement for unpaid wages and benefits they would otherwise have received.