Classification of a worker as either an employee or an independent contractor can be critical, and misclassification can have serious consequences. Improperly classified workers are often denied access to benefits and protections, such as overtime pay, unemployment insurance, Workers’ Compensation protection, and more. At the same time, classification may adversely affect state and federal government taxes and funds, so a business owner may face severe legal consequences if an individual is classified as an independent contractor but the government classifies the individual as an employee.
Analysis - The Three Factors
Correctly distinguishing between employees and independent contractors can be difficult, especially in light of how working relationships have become increasingly blurred in an era of constantly changing technological innovations. Under the common law, the three primary factors for analyzing the working relationship are:
- Behavioral - To what extent does the business owner control what and how the worker performs his or her responsibilities.
- Financial - To what extent does the business owner control the business aspects of the workers’ job, such as how the worker is paid, whether expenses are reimbursed, how supplies and tools are paid for.
- Type of Relationship - To what extent are there expectations or written contracts regarding employee-type benefits, such as insurance, vacation pay, pension or retirement funds; how long will the business relationship continue; and to what extent is the work performed a critical aspect of the business?
If, once the factors are weighed, it still remains difficult to make a determination as to classification, a Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding” can be filed with the IRS. This form can be filed by the business or the worker, and it can take over six months to get a reply from the IRS. This is a useful tool for business owners who repeatedly require workers to provide the same services.
Consequences of Misclassification
Legal battles between the government, workers, and companies like Uber and Lyft have recently propelled this issue into the public limelight. These companies argue that they are only technological service providers that allow independent drivers - who own their own vehicles, set their own hours, and pay their own expenses - to connect with people who need transportation services. On the other hand, the government and workers argue that Uber and Lyft exercise employer-like control over the drivers, setting their rates and standards, and having the right to fire the drivers.
If the issue is ultimately resolved in favor of classifying all these drivers as employees, the business models for Uber and Lyft can be severely impacted. The California Labor Commission has already ruled that a San Francisco Uber driver was an employee and ordered Uber to reimburse the driver $4000 in expenses for the short period of two months she was acting as an Uber driver. One estimate found that this kind of classification could cost the company tens of thousands of dollars per driver who becomes classified as an employee—and there may be over 160,000 drivers working for Uber that are applicable for such classification.
Regardless of the company, misclassification could result in a business being forced to pay back state and federal taxes for unemployment, disability, Social Security and Medicare for the period of time any worker was misclassified. Additionally, such a business could also be responsible to compensate the workers for unpaid benefits, such as expenses, overtime, health insurance, workers’ compensation, and retirement payments.
For all these reasons, it is imperative that businesses get the employee vs. independent contractor classification right the first time.
Brooklyn Business Lawyer Regina Gordon Counsels Entities About Employment Issues
If you own a business in New York, Regina Gordon Law Office can guide you through every stage of the process. We provide guidance that can save you from headaches and crippling legal expenses down the road. To discuss your goals, contact us at 347-770-7507 or submit an online inquiry today. We serve clients online throughout New York State, including Long Island, New York City (NYC), Brooklyn, Manhattan, Queens, Bronx and Staten Island.