Independent contractor or employee? the pitfalls of employer misclassification

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Courtesy of Waste Advantage Magazine

Here is a hypothetical for everyone to consider: You are the owner of a garbage company, XYZ Sanitation, Inc. Like most business owners, your payroll tax burden is substantial, and is one of the factors that is significantly reducing (or eliminating) your profit margin. As part of your strategy to reduce this tax burden, you make the business decision to approach some, or all of your employees, telling them that effective immediately you will not withhold taxes from their paychecks, and will instead list them as “Independent Contractors” on your records. Or maybe a single employee or group of employees approaches you, and requests that you pay them as “Independent Contractors” and not withhold taxes from their paychecks (as a proposed benefit to both you and them).

New Developments

0hen it comes to wage and hour matters, everyone is usually doing “something” wrong that may end up costing a business tens of thousands of dollars, if not substantially more. The Department of Labor (DOL) (both Federal and the State in which you conduct your business) has enacted a number of laws related to the money that workers of your business are to receive. Recently, two developments have arisen in the Federal Sector that requires every employer in the refuse collection and recycling industry to reassess how they operate their business. The first is that the DOL and the Internal Revenue Service (IRS) have targeted Employer Misclassification of Independent Contractors as a top enforcement priority. In addition to this enforcement mandate by the DOL and IRS, the DOL has also taken steps to enact rules that would require companies to carry out a written analysis of a worker’s status, and to also disclose that status to the worker and keep a record of the analysis in its files. The DOL’s proposed 2011 budget also seeks increased spending on enforcement, and for grants to States to help them deal with these misclassification issues as it relates to unemployment insurance programs.

Second, the Senate, through Senator Sherrod Brown (D-Ohio), has introduced a bill (“Employee Misclassification Protection Act” or “EMPA”) that would crack down on this classification of workers as Independent Contractors when these workers are actually employees. The bill would also affirmatively state that such misclassifications would be a violation of the Fair Labor Standards Act (FLSA) (which misclassification of workers alone is not currently a violation of), and would increase penalties for companies that misclassify workers.

Why a new interest in this misclassification issue? The answer is simple: we are living in an age of deficits of trillions of dollars. By misclassifying employees, the Federal government is being denied taxes (i.e., revenue). Additionally, Independent Contractors are currently denied items such as minimum wage, overtime, workers’ compensation, unemployment and retirement benefits. Therefore, any means with which the Federal government can use to obtain additional money into the Treasury in an attempt to deal with this deficit is going to be pursued and aggressively enforced.

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