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Independent contractors and employees are not the same. Classifying a worker as an independent contractor, rather than an employee, may appear at first glance to result in financial savings and reduced liability. But the consequences of using one classification versus the other may mean the difference between tax obligations, compliance with regulations governing wages and discriminatory actions, obtaining workers’ compensation insurance and providing employee benefits.

However, employers that misclassify employees can be liable for back wages, unpaid benefit contributions, back taxes and unpaid workers’ compensation premiums, in addition to penalties and fines. The employer also may be subject to vicarious liability for wrongful acts of a worker who has been misclassified as an independent contractor.

Moreover, businesses can be exposed to audits by the Department of Labor (DOL), the Internal Revenue Service (IRS) and many state agencies, all of which are working together to combat worker misclassification pursuant to partnership agreements for information sharing and coordinated enforcement.

Independent Contractor Vs. Employee

The distinction between independent contractors and employees misclassified as independent contractors is a function of complex laws and policies set by federal and state bodies, as well as the courts’ interpretations.

For example, the test for an independent contractor classification pursuant to workers’ compensation laws varies from state to state. However, over time, the definition of “employee” has consistently been interpreted more broadly, while the definition of “independent contractor” has been interpreted more narrowly.

IRS and DOL Guidelines

While there is no sure test to determine a worker’s status, generally the tests employed by the IRS and the DOL can provide useful guidelines for employers. The IRS considers several factors to determine the degree of control and independence of the worker. These include determining:

  • whether the company controls or has the right to control what the worker does;
  • whether the employer controls how the worker is paid and which expenses, if any, are reimbursed by the employer;
  • who provides the tools and supplies to perform the tasks;
  • whether the worker has a written contract;
  • whether the worker received any benefits such as paid vacation days or health insurance; and
  • whether the relationship is ongoing or finite.
The IRS looks at each case independently and considers the entire relationship when determining a worker’s classification.

The DOL employs an “economic realities” test to determine who is an employee for purposes of establishing whether a worker is covered by federal minimum wage and overtime regulations. The economic realities test considers:

  • whether the worker is economically dependent of the employer or in business for him or herself;
  • whether the worker’s “managerial skills” affect his or her opportunity for profit or loss;
  • the worker’s investment;
  • whether the work performed requires special skill and initiative;
  • whether the relationship between the worker and the company is permanent or indefinite; and
  • the nature and degree of the employer’s control.

Best Practices for Proper Classification

With these definitions in mind, construction business leaders should take a number of steps to ensure they properly classify their workers. These measures should include involving a human resources department to ensure a true independent contractor relationship exists.

Employers also should rely on written independent contractor agreements to address the DOL and IRS considerations. Lastly, business leaders should conduct periodic self-audits to ensure all workers are properly classified and consult with an attorney who specializes in employment law to ensure compliance.

The financial contribution necessary to ensure a business is in compliance with federal and state regulations is de minimums in comparison to the consequences a business can avoid for non-compliance.

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