Businesses are not infrequently subjected to competing and often unclear legal rules. Take, for example, the independent contractor versus employee classification morass. Sophisticated Fortune 500 companies find themselves just as frustrated as small businesses in trying to comply with the law. It is not always easy to determine when a worker may be engaged as an independent contractor or when he or she must be hired as an employee; the law frequently does not provide any concrete answers. Moreover, different states have different rules, and those rules may differ from the viewpoint of the Internal Revenue Service (IRS) and U.S. Department of Labor (DOL). Even if both the business and worker want to establish an independent contractor relationship, the law may not allow it.
The U.S. Department of Labor is actively on the look-out for employers who misclassify workers as independent contractors rather than employees. In concert with the IRS, the Department of Labor has partnered with about half the states in an effort to identify instances of worker misclassification. DOL is engaging in “strategic enforcement” by focusing on particular industries in which it believes that violations may be the greatest.
The fact that different states have different rules is particularly troublesome for businesses that have workers in different states. In the Washington D.C. Metropolitan Area, the problem can become particularly knotty since a business’s worker might provide services to clients located in Virginia, Maryland, and the District of Columbia all on the same day. One state might consider the worker an employee while the other might treat the worker as an independent contractor.
In Virginia, an independent contractor is a person who is employed to do a piece of work without restriction as to the means to be employed and who employs his own labor and undertakes to do the work according to his own ideas, or in accordance with plans furnished by the person for whom the work is done. The key is that the independent contractor is held accountable only for results. While easy to state and understand, the difficulty is in applying this rule to individual circumstances since many workers do not fit neatly into this criteria; not infrequently, workers exhibit characteristics of both employees and independent contractors.
To make matters worse, DOL takes a fairly expansive view of what makes a worker an employee as opposed to an independent contractor. Summarized, its focus is on whether the worker is really in business for him or herself (and therefore an independent contractor) or is economically dependent on the employer (and therefore an employee).
The consequence of getting it wrong, and treating a worker as an independent contractor when, in fact, the worker is an employee, can be devastating. It can lead to a business becoming liable for unpaid taxes, unpaid overtime, and various other penalties. Furthermore, as the law develops, what might have been permissibly characterized as an independent contractor relationship years ago, might now be found to be more like an employment relationship. Periodically auditing how your company classifies its workers is essential to minimizing unexpected liabilities in a changing legal and regulatory environment.