Employee Misclassification May Implicate Tax, Employment Laws

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One of the most basic provisions in an employment agreement is the classification of a newly hired individual as an independent contractor or a full- or part-time employee.

Yet a recent article suggests that some employers may have wrongly designated employees as independent contractors as a tax-saving strategy during the recent recession. According to one estimate, that designation may reduce an employer’s labor costs by as much as 30 percent. The savings come from both employment taxes and health benefits.

With that savings incentive, it’s perhaps not a surprise that some companies may be tempted to designate full-time workers as independent contractors. The construction industry may be particularly susceptible to this misclassification practice. Unfortunately, the practice hurts both state governments and individual employees. States depend on payroll taxes for their revenue. Employees falsely designated as independent contractors, in turn, may be double-billed for taxes that were already withheld from their payroll.

Many states are investigating alleged instances of this misclassification. In fact, 30 states currently have laws regarding worker misclassification, representing an increase from only 23 states in 2010. An employment law attorney might advise that an effective safeguard against such an investigation is clear language in an employment contract.

With the help of an attorney, an employment agreement can clearly set forth all material terms, includes job duties, wages, and worker classification as an independent contractor or full- or part-time employee. Of course, such contracts may need to be customized for particular job openings, but an attorney might ensure that any modifications comport with existing laws and avoid ambiguity for employer and employee alike.

Source: insurancejournal.com, “States Going After Employers Who Misclassify Workers as Independent Contractors,” Jim Efstathiou Jr.