Don't Be Blindsided with an Overtime Audit Due to Misclassifying Independent Contractors
Posted on March 10, 2010 by Laura L. Himelstein, Esq.
The IRS has stepped up enforcement of rules regarding independent contractors. Early this year, the IRS started deploying auditors to conduct intensive audits of an estimated 6,000 employers in different industries and including both large and small companies. The federal government believes that misclassification is on the rise given that independent contractors receive fewer incentives to trim costs during these difficult economic times. The IRS is engaging in vigorous enforcement for various reasons, including to collect more money for the federal tax coffers and as a result of the Obama administration’s friendly approach to labor.
Correct classification of independent contractors depends on weighing multiple factors, including without limitation: the autonomy exercised by the worker, who controls his/her performance and schedule, where the work is performed, who owns the tools required to perform the work, whether the worker works for one or more different companies at the same time, whether the parties have an agreement and if so, what intent is evidenced in the agreement, and other factors.
If a worker has been misclassified as an independent contractor, the worker could be entitled to seek overtime payments for work performed. Independent contractors with newly conferred employee status also may seek other benefits, including unemployment benefits or workers comp, or bring legal action that they would not have done when they thought they were independent contractors.
But that is just the start. While misclassifying a single worker may lead to some liability for overtime payments and other benefits, employers should take a hard look at the bigger picture. An IRS audit could possibly lead to an audit by the federal or state Department of Labor. Such an audit might examine a company’s overall approach to independent contractor classifications and overtime. In fact, Obama’s 2011 budget proposes a joint taskforce of the IRS and DOL to crack down on independent contractor misclassification.
In addition, workers who believe they have been improperly classified and are owed overtime could band together and bring a class action. That is what is currently happening to Blackwater Security Consultants.
So beware – misclassifying an independent contractor can have substantial, costly consequences, from having to pay overtime and other benefits to one misclassified worker – to an overtime audit of your entire workforce to a class action lawsuit for unpaid benefits and/or overtime.