For a company seeking to control labor costs or manage its workforce to account for fluctuations in the business cycle, classifying workers as independent contractors can appear an attractive option. Because independent contractors are not “employees,” they generally do not receive employee benefits, are not paid “overtime,” cannot receive unemployment benefits, and, in many states, are ineligible for Workers’ Compensation benefits.
The temptation to avoid these additional expenses and potential liabilities can lead employers to classify workers as independent contractors even when the circumstances do not truly warrant that classification. Even employers with the best intentions can misclassify employees as independent contractors because of the confusing and inconsistent tests for classification. But such misclassification can be costly and the risks are growing. In the last several years numerous federal and state agencies—including the U.S. Department of Labor (DOL), the Internal Revenue Service (IRS), and the New York State Department of Labor (NYSDOL)—have stepped up their enforcement efforts regarding the misclassification of independent contractors.
Federal Scrutiny
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