Are all the workers at your
organization properly classified as either employees or independent
That’s a question that business
leaders and HR professionals need to consistently ask – and make sure
they are getting an accurate answer. It’s critical to know ways your company
can “stay safe” when it comes to a range of compliance issues such as
classifying workers. The more you know, the better prepared you are to
take preventative steps to avoid hefty fines, penalties, and potential
reputation issues related to noncompliance.
The issue of misclassifying workers is
drawing increased attention as of late, as both state and federal agencies have
been more focused on enforcement. Worker classification is also
making headlines due to the Affordable Care Act. This health-care law
will impose penalties against companies that don’t provide quality and
affordable coverage to their employees. Specifically, the law mandates that
a company with at least 50 full-time employees offer coverage to at least 95
percent of them. The 50-employee cut-off has smaller companies closely
assessing how they currently classify employees, while also influencing
decisions on whether to add either employees or independent contractors to the
No doubt, there are some financial
incentives for organizations to classify employees as independent contractors
– a fact that can put a company at risk for misclassifying if sound policies
and best practices are not in place to govern classification.
Specifically, the potential financial
advantages for a company to hire independent contractors over employers, include:
- Independent contractors are reported to the IRS on a Form 1099 instead of a
- Employers are not required to
withhold taxes, make Medicare or Social Security contributions, or pay
unemployment and worker’s comp premiums for independent contractors.
- Employee benefit plans, including group health insurance, paid leave, and
401(k) plans only cover employees, and do not typically extend to independent
Of course, any financial incentive
evaporates swiftly at an organization found to be out of compliance. With
enforcement efforts intensified, companies need to be fully aware
of the potential risks.
And the risks are considerable.
Companies found to be misclassifying workers are subject to fines and back
taxes. On both the federal and state level, fines can be as much as 100 percent
of the employment tax due, depending on the level of culpability. In addition,
companies can also be liable for all federal income tax not withheld, all
Social Security taxes not withheld, and unemployment tax insurance of 6.2
Stacy Reynolds, a Vice President of
Operations at Adecco Professional Staffing who advises on compliance issues,
emphasizes that regulations that govern classifying workers contain many “gray
areas.” Her overarching recommendation is to partner
with a tax professional – either on staff or contracted – who
stays current on compliance issues regarding worker classification.
"You really need a tax pro to help
make sure you are classifying correctly,” Reynolds says. “Many companies are
letting HR make determinations. While they are well-intentioned,
that can be a problem because the law is very nuanced."
Reynolds suggests that companies also
establish a process to assess classification status not only when a worker
starts a job but also on a regular basis to make sure their role has not
changed in ways that would require reclassification.
Some other best practices for
- Develop enterprise –wide 1099 policy to be followed by internal resources
and staffing suppliers.
- Require all suppliers to complete a 20-point
IRS checklist on each 1099, and provide documentation prior to start.
- Avoid having independent contractors do the exact same work as employees.
- Require all staffing suppliers and all 1099 contractors to provide
current insurance policies. Uninsured contractors should be prohibited.
- Require all independent contractors to sign documentation stating they
are not entitled to, and will not seek, unemployment benefits.
It’s also good practice to establish
a standard “start-of-work” meeting that covers what the independent contractor
needs to accomplish. Make certain that contractor does not receive anything
that resembles a job description, but rather a detailed list of specific work
and deliverables that need to be completed.
Justin A. Meyer, an attorney with
Meyer and Associates in Hauppauge, NY, emphasizes that companies need to
establish and adhere to standardized policies regarding worker classification,
and make sure documentation is kept current.
“Employers who work
independent contractors need to be prepared for an audit and ensure
they have the documentation in place to support their positions,” Meyer says.