The Friedman Blog

Posted on 04/25/2016, by Jeremy Edsall

Misclassification of Workers Can Result in Host of Problems

When it comes to defining workers as employees or independent contractors you need to be very careful to distinguish the differences in classifications and what the implications are of misclassifying workers.

You can run afoul of a number of government agencies including the IRS, State Agencies, The Department of Labor, and OSHA.

Independent Contractors

•    Provide goods or services pursuant to a contract or verbal agreement
•    Do not work on regular basis, but only when needed
•    Paid on freelance basis
•    Are themselves business owners, operating as a franchise, LLC, or under an umbrella company
•    Wages in excess of $600 to independent contractors are reported to the IRS

Employees

•    Generally are an integral part of the business
•    Permanent relationship
•    Provided with tools or equipment
•    Under control of company, which sets schedules and hours worked
•    Significant company investment in the employee
•    Employee relies solely on company for majority of income

Although it is cheaper to hire independent contractors, trying to save costs by classifying employees as independent contractors isn’t a good idea.  You can be cited for not paying Social Security, Medicare and unemployment taxes, and can be held responsible for [Worker’s Compensation](http://www.insurancejournal.com/news/east/2014/05/13/328972.htm) which can result in significant fines.  

Under the Virginia Worker's Compensation Act it states **"an “employee” includes every person in the service of another under any contract of hire, written or implied. “Employee” includes statutory employees (subcontractor’s employees), corporate officers, minors, undocumented workers, working family members, apprentices, temporary and seasonal employees. A business that doesn’t count all of its employees may not realize it is required to carry coverage.**

Employers should also be aware, designating a worker as an “independent contractor” does not necessarily mean they are not an employee. Workers’ compensation looks to whether the business exerts control over the manner and means of how the work is performed. In the event of a claim, the facts of the work circumstances will determine if the individual is covered for workers’ compensation, regardless of payment on a 1099 designation.

You can also be held liable for unsafe work practices of independent contractors if they are deemed to be employees of the business.

Sources: Virginia Workers Compensation Commission
                 Wikipedia
                 OSHA.gov

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