Misclassification: Employee or Independent Contractor

Updated: May 17, 2021

By: Stephen L. Shields

Date: October 12, 2020

As most employers know, an employee must be paid the minimum wage and time and one-half after forty hours. However, the antecedent requirement is that the individual be an employee working for a “covered” employer. Some employers classify a particular worker as an independent contractor instead of an employee, either as a result of confusion or to avoid additional expenses (for example: overtime; employer’s share of Social Security and Medicare taxes; benefits; unemployment compensation tax, etc.).

Unfortunately, an employer who misclassifies a worker as an independent contractor can face stiff penalties. For example, pursuant to the Fair Labor Standards Act (and not considering other statutory issues), the employee is entitled to back wages plus liquidated (that is two times the back wages) and if he/she has an attorney, the employer must pay the attorneys’ fees. For example, a recent case in Tennessee, a Federal District Court Judge awarded $300.15 to the employee and $48,802.02 in attorneys’ fees!

Different agencies have different factors for determining whether a worker is or is not an independent contractor. For example, in Tennessee, recent Tenn. Code Ann. 50-2-111 provides for a 20-factor test.[1]

As a starting point, the IRS provides a questionnaire that is helpful to begin the analysis on how a worker should be classified.[2] Section 6 says, “Describe the firm’s business.” Section 8 says “Describe the work done by the worker and provide the worker’s job title.” In other words, if you own a landscape company and the worker is performing landscaping work, you can guess there will be a presumption that the person is an employee and not an independent contractor. Interestingly, the IRS does provide that in very close cases a written contract setting forth the understanding between the parties that an independent contractor relationship has been created and not a relationship of employer-employer may tip the balance.[3]

Reading a summary of reported cases dealing with this issue shows that in most instances a worker who has filed suit achieved a legal victory. Thus, the admonition, be very careful in your determination whether a worker should be classified as an independent contractor or an employee.

Another mistake is classifying an employee as exempt when they are non-exempt. That will be the focus of a future article.

This article is for informational purposes only and is not intended to provide legal or tax advice. Receipt of or viewing information on this web site does not create an attorney-client relationship. You may contact our firm to establish such a relationship, but in any event, please consult an attorney or tax professional of your choosing for advice on this or any other legal topic.

------------------------------------------------------------------------------------------------------------------------------- [1] https://advance.lexis.com/documentpage/?pdmfid=1000516&crid=efdb2dfd-e8e5-44f1-853f-49504f41fbd9&nodeid=ABYAACAABAAL&nodepath=%2FROOT%2FABY%2FABYAAC%2FABYAACAAB%2FABYAACAABAAL&level=4&haschildren=&populated=false&title=50-2-111.+Application+of+chapter.&config=025054JABlOTJjNmIyNi0wYjI0LTRjZGEtYWE5ZC0zNGFhOWNhMjFlNDgKAFBvZENhdGFsb2cDFQ14bX2GfyBTaI9WcPX5&pddocfullpath=%2Fshared%2Fdocument%2Fstatutes-legislation%2Furn%3AcontentItem%3A5WF2-B360-R03N-Y4M0-00008-00&ecomp=c38_kkk&prid=7ebf0261-0da7-48b6-a050-a6c4d32eaa51 [2] https://www.irs.gov/pub/irs-pdf/p1779.pdf [3] https://www.irs.gov/forms-pubs/about-form-ss-8

15 views0 comments