(Note from Editor: As you know, this is a “hot topic” with EmployerNomics. We will be adding in some of our own comments at the end. Once again, thank you to Payroll Medics and the HR Support Center for their input.)

Question:

What happens if someone is misclassified as an independent contractor?

Answer from Kara, JD, SPHR:

“There are many potential liabilities resulting from misclassification and they come from several sources: namely, the IRS, unemployment insurance, workers’ compensation, federal wage and hour law, and state wage and hour law.

An employer will owe up to three years of back taxes on the misclassified employee’s wages, in addition to fines and interest. They will also owe back unemployment and workers’ compensation insurance. And they may also owe premiums on other state-run insurance programs, such as paid family leave.

In addition to money owed to government entities, employers will also owe misclassified workers two to three years of back pay for any work they did that was not compensated at applicable minimum wage and overtime rates, as well as liquidated (extra) damages equal to that amount. Finally, in states that have their own minimum wage, overtime, or employee classification laws, the employee will likely to be able to sue and recover under both state and federal law. There may also be hefty attorney fees on top of the costs described above.

It doesn’t matter much if an employer misclassified someone by accident. Under certain laws, willfulness will increase the potential damages from two years of back pay to three, and lead to higher statutory penalties. But most of the laws at play in misclassification and wage and hour cases are strict liability statutes, meaning it makes no difference that the employer didn’t mean to do it incorrectly.”

About Kara

Kara practiced employment law for five years and worked in Human Resources for several years prior to that. As an attorney, she worked on many wage and hour and discrimination claims in both state and federal court. She holds a Bachelor of Arts degree from Oregon State University and earned her law degree from Lewis and Clark Law School.

Comments from John Will Tenney, CEO EmployerNomics

Also a major concern, and the primary reason states enforce actions against 1099 abuse, is SUTA – State Unemployment Tax Act.

Technically, the IRS gets their money from the self employment tax when the contractor files, since the 15.3% includes the employee and employer matched portions of SS/Med. They are not as motivated to go after “1099 employees” as much as the states are.

Many states will apply penalties and go back as many as five years to recover lost unemployment taxes.

In Florida, we have noticed that it is usually the state department of revenue that “cracks down” on contractors who should be classified as employees. While it is tempting for an employer to avoid the somewhat expensive overhead of having an employee, it can be much more costly to get “caught.”

Legal Disclaimer: EmployerNomics is not engaged in the practice of law. The content in this article should not be construed as legal advice, and does not create an attorney-client relationship. If you have legal questions concerning your situation or the information you have obtained, you should consult with a licensed attorney. Neither EmployerNomics nor the HR Support Center cannot be held legally accountable for actions related to its receipt.