Classifying an Independent Contractor (1099) | DCR Workforce Blog

Classifying an Independent Contractor (1099)

By all accounts, the component of temporary workforce in the overall workforce in the US is growing steadily while the regulations controlling the employer-employee relationship are vigorously keeping pace. Various regulatory bodies monitor the contractual obligations to ensure that the employees are protected and that the government is not cheated out of the tax-related payments. Independent contractors form a part of the contingent workforce and classifying an employee as an IC gives an employer a lot of benefits in avoiding the payment of benefits, contributions under the Federal Insurance Contributions Act and Federal Unemployment Tax Act, state unemployment contributions, workers’ compensation premiums, or overtime.

While some employers claim that they applied the classification only after carefully reading and thoroughly understanding the 160 page training manual released by the IRS on the topic; the Department of Labor claims that 30% of employers misclassify their employees. The smallest of firms have come under the IRS’ scanner thanks to red flags like having the same worker file a W-2 and 1099 in the same year, or when the IC 1099 files an unemployment claim or a complaint with the Department of Labor or filing a Form SS-8 (to verify if the IC classification was applicable) – or a Form 8919 stating the uncollected Social Security Tax and Medicare Tax on wages.

Misclassification of an employee, whether the error is genuine or deliberate would not just end with exposure to tax liabilities. The employer would also be held liable for all the payments avoided including overtime pay as well as benefits to the employee. Ohio levies increased workers’ compensation premiums along with the taxes, fines, penalties and legal costs.

State loses money in unemployment insurance taxes, workers’ compensation premium as well as income tax revenue. By initiating in 2010, a major Misclassification Initiative providing the Department of Labor an additional force of 100 agents to increase the states’ capabilities in addressing the issue of misclassification, President Obama has clearly indicated the seriousness with which his government is planning to tackle this issue.

No employer should assume that having a signed independent contractor agreement provides any immunity against the inquiries of the various regulatory bodies like the IRS and DOL. Similarly no release or waiver letters signed by the employee are enforceable unless approved by the DOL.  It must also be remembered that many opinion letters issued by the DOL’s Wage and Hour Division under the Bush Administration have been set aside by the current regime. It would pay to re-evaluate existing contracts also because it is possible to get the authorities to initiate an inquiry even through an anonymous complaint.

The DOL website says that “employers who seek to exclude workers for the FLSA’s coverage will be required to perform a classification analysis, disclose that analysis to the worker, and retain that analysis to give to Wage and Hour Division’s enforcement personnel who might request it.” The day this gets converted to into a rule, employers may have to be ready with written explanations laying out their rationale behind the classification.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.