What are the Penalties for Misclassifying Workers as Independent Contractors instead of Employees?

The Coronavirus and Eviction: Landlord Rights and Eviction Restrictions
April 15, 2020

Cropped shot of two business people discussing their project together with laptop computer

In the wake of the Coronavirus pandemic, as of April 13, 2020,  more than ten percent of American workers have filed for unemployment.  Unfortunately, many have been denied certain benefits due to their employment status as independent contractors.

Louisiana Employment Laws

The Louisiana Workforce Commission provides the rules and regulations for employers in regard to hiring employees and independent contractors in Louisiana.  There is a presumption that a worker is an employee and not an independent contractor.  If a worker is deemed an employee, they need to be on payroll, receive a W-2, and be covered by workers compensation and unemployment insurance.  An additional factor not always considered is that employees who are acting in the course and scope of their employment can open their employer up to lawsuits due to their negligence.  On the other hand, independent contractors can be paid with a 1099 and their negligence can most often not be attributed to the employer via respondeat superior.

Why Do Employers Misclassify Workers?

The most logical answer is to reduce overhead and avoid dealing with the paperwork and expense of an ordinary employee.  When an employer classifies a worker as an independent contractor, he avoids mandatory overtime pay, social security and medicare taxes, benefits, workers’ compensation insurance, and most relevant to today’s circumstances: unemployment insurance and/or compensation tax.

Factors in Determining Employee Status

The following factors are used to determine the classification of a worker.

  1. The individual’s services are performed on the business premises of the company.
  2. The individual has no financial investment in an ongoing business related to the services he

is performing.

  1. The company provides supplies, materials and necessary tools and equipment for the

individual.

  1. The company provides training to the individual in the performance of the services.
  2. The company’s duties to third parties would require that the company maintain control over

the individual’s performance of services.

  1. The individual uses the company’s business name in the performance of the services.
  2. The individual is required or expected to personally perform the services.
  3. The individual is required to report on a periodic basis the services performed, the amount

of time the individual performed the services or other details as to the performance of

services.

  1. Effective operation of the company’s business requires that the individual be supervised or

controlled in the performance of his service; there is need for supervision of the individual.

  1. There is representation (explicitly or implicitly) by the company to customers or the general

public that the individual is an employee of the company.

  1. There is no written contract or agreement between the company and the individual.
  2. The company can terminate the individual’s services at any time without liability for

damages.

  1. The individual does not have a separate business address or telephone number.
  2. The individual is prohibited from competing with the company either during the time he is

performing services for the company or for any period thereafter.

  1. The service performed is of an unskilled nature.
  2. The type of service performed by the individual is the only service, or a major part of the

service, which the company provides.

  1. The individual has no separate insurance coverage for liability in connection with the

services performed.

  1. The individual has no other similar relationships with companies for which he performs

similar services.

  1. The individual is paid on a piece-rate or hourly basis rather than for a short-term project or

job.

  1. The arrangement is for ongoing, continuous services rather than for a short-term project or

job.

  1. The individual is established to the extent that he is financially dependent on the company,

and cannot survive economically if he ceases to provide services for the company.

  1. The individual is required or encouraged to keep regular hours or to perform services only

during the company’s regular hours.

Factors in Determining Independent Contractor Status

            The following factors indicate that the relationship is one involving an independent contractor:

  1. The individual has his own place of business separate from that of the company.
  2. The individual provides his own equipment, supplies and facilities.
  3. The individual pays for his own expenses for travel and entertainment, licensing and

occupational permits.

  1. The individual has other similar arrangements for the performance of services with other

companies.

  1. The individual receives payment by lump sum or contract rate rather than by an hourly or

piecework basis.

  1. The individual holds himself out to the public as available to perform similar services for

others and does in fact perform such services for others.

  1. The services are of a professional or technical nature, the details of which are outside the

usual course of business and best left to the discretion of the individual.

  1. The arrangement between the individual and the company is in the form of a written

agreement which has a specific contract amount and a definite term.

  1. The individual advertises for the performance of services.

It is important to note that each case has to be considered on its own facts and the various factors have to be weighed against each other.  Usually, general control is sufficient to consider the relationship as employment while the existence of a written contract typically indicates independent contractor status.

What are the Penalties if an Employer is Misclassifies a Worker?

While state and federal agencies perform regular audits on businesses, in most instances, employers misclassifying workers are found in one of three ways.  First, a worker will dispute its classification with its employer and subsequently file fa complaint with the Department of Labor.  Second, a worker who is injured on the job is denied a workers’ compensation benefit.  Finally, and most relevant, a worker who is laid off or terminated  and then is denied unemployment benefits.

In a National Employment Law Project study, it was found that in some states, more than 60% of employers misclassify their workers. Therefore, with the recent rash of unemployment claims, businesses  across the country should be prudent as to their worker classifications.

The consequences for employers misclassifying workers can vary depending on whether or not the DOL and the IRS determine the misclassification was unintentional, intentional, or even fraudulent.

If the misclassification was unintentional, the employer faces penalties including but not limited to the following:

  • Fines of $50 for each Form W-2 that the employer failed ot file
  • Penalties of 1.5% of the wages, plus 40% of the FICA taxes that were not withheld
  • 100% of the matching FICA taxes the employer should have paid
  • Interest
  • Failure to Pay Taxes penalty equal to .5% of the unpaid tax liability for each month up to 25% of the total tax liability.

If the IRS suspects fraud or intentional misconduct, it can impose additional fines and penalties including but not limited to the following:

  • Penalties totaling 20% of all wages paid plus 100% of the FICA taxes owed
  • Criminal Prosecution
  • Fines of $1,000.00 per misclassified worker
  • Imprisonment
  • Personal Liability for Uncollected Taxes

The consequences can be serious for misclassifying a worker so be objective and prudent when making that determination.

Should you have any questions or you would like to discuss this issue in further detail, please do not hesitate to contact us to schedule a free consultation.

Leave a Reply

Your email address will not be published. Required fields are marked *


Important: This site makes use of cookies which may contain tracking information about visitors. By continuing to browse this site you agree to our use of cookies.