Independent Contractors and Employers - A Risky Endeavor

With competitive and economic pressures impacting a business’s bottom line, many employers seek ways to reduce costs.  In order to achieve this objective, many employers are classifying workers not as employees, but as independent contractors with the intent of avoiding or reducing the cost of workers’ compensation insurance, overtime and unemployment claims.

When the issue of whether a worker is an employee or independent contractor arises, and it will arise at some point, the employer bears the legal burden of proving that the worker is an independent contractor.  A number of factors are considered in determining whether an independent contractor relationship exists.  First, and foremost, a written agreement is not dispositive and the court or administrative law judge will go behind the agreement to determine if the worker is truly an independent contractor.

Some, but certainly not all, of the factors considered: whether the employer has the right to control the means of the work; whether the worker is engaged in a separate business; skill required in the particular occupation involved; whether the employer provides the tools and place of work; whether the worker has the right to hire and terminate others to assist him/her; length of time services are to be performed; and method of payment – by time, piece rate or job.

An employer found to have misclassified a worker or workers as independent contractor faces substantial financial liability which includes, but is not limited to, overtime pay potentially dating back four years, reimbursement of expenses dating back four years, federal and state tax liability including penalties and interest, stop orders for, among other issues, failure to secure proper workers’ compensation insurance.

Business consultants have developed a niche in advising employers on how to implement procedures whereby workers are classified as independent contractors.  Ultimately, the procedures implemented are found lacking and the employer is left financially exposed.  The potential exposure is substantial and severe.  Employers are well served to seek guidance from legal counsel before classifying workers as independent contractors.