McClatchy Newspapers, the parent company of the Fort Worth Star-Telegram, just concluded a weeklong series of reports on “misclassified” employees. This practice involves taking workers who should be classified as employees and classifying them as independent contractors. This allows the employer to avoid paying social security and unemployment taxes, to avoid withholding income tax payments from the employee’s wages, and to avoid paying for workers compensation insurance. It is also flatly illegal.
Almost none of these misclassified employees pay their own Federal income taxes or self-employment taxes. If they are injured on the job, they have no workers compensation coverage to pay for their medical expenses, and no social security disability if they are permanently disabled. Not only are the individual employees hurt, but companies that play by the rules and obey the law are put at a competitive disadvantage because companies illegally misclassifying their employees can underbid them on projects.
So, when is a worker an employee, and when is that worker an independent contractor? The key distinction lies in who controls the details of the worker’s work. If the employer controls the details of the work, tells the employee went to report for work and when to leave and when the worker can go on break and when he must return, that worker is an employee. If the employer also provides all tools and safety equipment, the worker is an employee.
On the other hand, if the worker controls the details of his work, decides when to come and go, and brings his own tools and safety equipment to the job site every day, that worker can probably be legally classified as an independent contractor. True independent contractors pay their federal income taxes in quarterly estimated tax payments, along with the full share of self-employment taxes (which otherwise is split between the employer and employee). The independent contractor is responsible for his own medical insurance and benefits.
According to the newspaper series, the practice of misclassifying employees as independent contractors has become quite widespread. As a result of all the media attention, not only will federal, state and local governments be watching for this practice much more carefully but also their competitors that have been playing by the rules will be much less hesitant to turn in companies that continue with this illegal practice. If you are a business owner and have questions about whether your workers are accurately characterized-either as employees or independent contractors-you should consult with an attorney to make sure your practices comply with the law. If you are a worker who believes that you have been misclassified as an independent contractor, you should contact an attorney, the Texas Workforce Commission or the US Department of Labor for assistance.
Businesses that misclassify their employees as independent contractors are cheating us all, but most of all their misclassified workers. Hopefully this practice is on the way out.