According to the NFIB this is one of the top 5 biggest problems across our nation for small businesses. According to the Department of Labor it is one of the most serious problems facing affected workers, employers, and the entire economy. Often times small to medium sized businesses are classifying employees as contract labor to avoid the expense of payroll taxes and benefits that come with a full time employee or to avoid immigration issues. However, if they are classified incorrectly this can come back to bite in fines, penalties, and back taxes that the business owner will be liable for.

In 2014, a total of $10.2 million was awarded to 19 states to help finance the government’s crackdown on independent contractor misclassification. The IRS has entered into a memorandum of agreement with the DOL. The idea of the agreement seeks to reduce incidences of misclassification of employees by providing the sharing of information and collaboration by the tax and labor agencies, as well as employment tax examinations of questionable taxpayers brought to the attention of the IRS by the DOL.

According to the state of Texas it doesn’t matter how the company titles the employee such as: agent, subcontractor, or independent contractor if their duties are that of an employee. Some of the topics that are investigated are:

  • Instructions – An Employee receives instructions about when, where and how the work is to be performed. 

An Independent Contractor does the job his or her own way with few, if any, instructions as to the details of the work.

  • Payment – An Employee is typically paid by the employer in regular amounts at stated intervals, such as by the hour or week. 

Independent Contractors normally pay all of their own business and travel expenses with reimbursement

  • Full Time Required- An Employee ordinarily devotes full-time service to the employer, or the employer may have a priority on the Employee’s time. 

A true Independent Contractor cannot be required to devote full-time service to one firm exclusively.

The Texas Unemployment Compensation Act requires businesses to pay money due for their employees. If a worker fits the definition as described for TUCA Workers in Section 201.041 they are considered an employee. The DOL has entered into alliances to promote enforcement with the IRS. They are calling this the Misclassification Initiative. Since the commencement significant liabilities to companies have resulted such as:

  • $105,000 overtime assessment against a Texas employer who considered workers to be independent contractors for their first 90 days;
  • $1.5 million judgment in a federal lawsuit brought against a cable installation company providing installations for Time Warner by the DOL for 250 former installers, who were misclassified as independent contractors and denied overtime compensation.
  • $277,000 assessment against a janitorial service subcontractor and its payroll services company found to be a joint employer of 233 low-wage custodians misclassified as independent contractors

The correct classification of workers as employees or independent contractors has critical implications for employers and employees. Remember preparedness is always better than avoidance. If you are questioning or certain that your workers are misclassified and not sure how to comply our team will be glad to assist you.