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October 1, 1999 

The importance of classifying 'independent contractors' accurately

By Robert Heiferman

Employers who believe that they can save money by simply reclassifying individuals who work for them as "independent contractors" may be in for a big surprise.

It has long been tempting to treat people as independent contractors. Employers are not required to pay social security, unemployment insurance, and workers' compensation insurance taxes on independent contractors. They are also not obliged to provide independent contractors with fringe benefits. Moreover, independent contractors are not protected by minimum-wage and overtime requirements.

While this may sound enticing to the unsophisticated employer, the risks of such misclassification are substantial.

Both the IRS and the Department of Labor have been cracking down on businesses that misclassify individuals as independent contractors. And random audits by the Department of Labor have increased in recent years. Employers found to have misclassified workers as independent contractors may have to pay back unemployment, workers' comp and social security taxes, as well as the employee's share of taxes not withheld from the paycheck. Employers may also face civil and criminal penalties and liability for overtime.

Thus, it is critical that businesses understand how the IRS and the Department of Labor determine whether a worker is an independent contractor. It is not sufficient to just work out a deal with the so-called independent contractor. If that individual files for unemployment benefits or is hurt on the job and files for workers' compensation benefits, these agreements, absent factual support for them, are of little value.

Independent contractors generally advertise themselves to the public, are free to work for whomever they wish, set their own hours, and are paid by the job (as opposed to by the hour). Independent contractors bear a risk of losing money in doing business; employees have no such risk. Independent contractors generally have their own workers' compensation coverage and are not supervised on a day-to-day basis.

A good example of an independent contractor is an individual who repairs a leaky roof at your business. Generally, a price is agreed upon as well as a desired result-a roof that does not leak by a specific date. Who actually fixes the roof is irrelevant. All that matters is that the roof gets fixed on time. The tools and supplies the roofer uses are determined and supplied by him. No restrictions are placed on the roofer taking other jobs.

Conversely, an individual who previously spent 15 years as your employee and who now works for you off the payroll as a "consultant" may not pass muster as an independent contractor; nor will an individual whose hours you schedule, equipment you supply and who works solely for you.

Employers must carefully determine if a worker they use is really in business for himself or herself. Otherwise, immediate savings may be more than offset by aggravation, legal entanglements, costs and penalties not far down the road.

Robert Heiferman is a partner in the law firm of Jackson Lewis Schnitzler & Krupman in White Plains, the nation's largest law firm representing management exclusively in labor, employment and benefits law, and related litigation. He will be discussing employment issues at The Business Council's Employment Law Seminars October 12, 13, 20, and 21 in Albany, Poughkeepsie, Buffalo, and Syracuse, respectively.