The Dangers Businesses Face of Misclassifying Employees
It is that time of year again—time for businesses to send out their W-2s and 1099s so that they can file their taxes and stay in good standing with the IRS. Thanks to the internet and the independent nature of a lot of positions, more companies are opting to hire independent contractors than they are full-time employees, which means more 1099s than ever are going out—which also means that more businesses are saving more money. Independent contractors are cheaper for businesses to retain, as they do not require those businesses to pay for health insurance, taxes, retirement, or any other benefits on the employees’ behalf. In fact, it is because of this lack of expenses that many businesses purposefully misclassify workers as “independent contractors.”
Misclassifying an employee as an independent contractor—whether done intentionally or not—can have serious consequences for the business. To avoid such consequences, you need to be aware of applicable state and federal regulations regarding employee classification. Though this post is intended to make you aware of some of those, your best bet would be to consult directly with a Fort Lauderdale business attorney if you have any doubt about whether or not your independent contractors are really “independent contractors.”
Consequences of Misclassifying Employees
Companies that misclassify employees are looking at consequences not just from the IRS, but from the U.S. Department of Labor and state agencies. Though this list is not exhaustive, it should give you an idea of what type of violations you may be guilty of by wrongly categorizing an employee as an independent contractor:
- Tax penalties;
- Wage law violations;
- Workers’ compensation violations;
- I-9 violations;
- Anti-discrimination violations;
- FMLA violations;
- Warn Act violations;
- Age discrimination liability;
- Unemployment insurance shortfalls; and
- Improper exclusion from benefits plans.
To avoid making any of the above violations, you need to understand what and what does not make an independent contractor.
Florida Worker Classification Guidelines
Florida’s laws regarding what and what does not make an independent contractor can be found in Florida Statute 440.02. Before we list the criteria for what makes a 1099 worker, you should first know that, according to subsection (15)(c)2., “all persons who are being paid by a construction contractor as a subcontractor” are considered employees, as are independent contractors and sole proprietors performing work within the construction industry. Aside from within the construction industry, however, at least four of the following six criteria must be met in order for a worker to be properly classified as an independent contractor:
- The individual owns and operates his or her own business and has a work facility, equipment, materials, vehicles, and other similar accommodations;
- The individual either has or has applied for a federal identification number, unless he or she is a sole proprietor;
- Any money owed to the individual for services rendered is paid to the business rather than the independent contractor;
- The individual holds one or more bank accounts in the business’s name for the purpose of paying business expenses;
- The individual is free to perform work for whichever entities in addition to or besides the employer without having to complete an employment application or process; and/or
- The individual is paid on a per-assignment basis rather than on an hourly basis.
If any of your workers meet four or more of the above criteria, they can be classified as independent contractors so long as your contract with them does not expressly state that an employment relationship exists.
If four of the six criteria are not met, an individual may still be classified as an independent contractor based on the nature of the individual situation with regard to meeting any of the following conditions:
- The individual agrees to perform work for a specified amount of money and controls the means through which the work is performed;
- The individual is responsible for the satisfactory completion of the work that he or she agrees to take on;
- The individual incurs the main expenses related to the service or work that he or she agrees to take on;
- The individual has continuing business liabilities or obligations;
- The individual receives compensation for work or services rendered on a per assignment basis or for a commission; and/or
- The individual is prone to profits and losses as any other business is.
Of course, every situation varies, and even if an individual meets several of the aforementioned criteria, your contract wording may make them an employee. For this reason, you should never enter an agreement with an individual contractor without first consulting with your Fort Lauderdale business litigation lawyer about the terms of employment, the nature of your proposed relationship, and your contract with them.
Save yourself unnecessary headache in the future, and contact Edward J. Jennings, P.A. to schedule a consultation today.