LEGAL ISSUES
Are Independent Contractors Your Company’s Ticking Time Bomb? Be sure you understand State and federal laws By Renea I. Saade
G
iven the current economic climate, most companies are hesitant to expand their work force. Many companies are still recovering from having to make the extremely difficult decision to lay off a portion of their work force. It is, therefore, a natural consequence many companies are opting to turn to independent contractors for their staffing needs. It makes sense. Independent contractors (who are also referred to as “1099 workers” because a 1099 IRS Form is issued to them instead of a W-2 IRS Form) appear to be the perfect solution to a company’s dilemma. They typically provide the immediate addition to the company’s work force without requiring the company to pledge significant overhead expenses or make any real commitment to that person. Under a true independent contractor relationship, a company is not obligated to cover the expense of training the worker, provide the worker with any equipment or tools necessary to perform the work at issue, provide the worker any of the benefits the company typically extends to its work force (medical, dental, vacation or sick pay, 401k contributions, etc.), pay unemployment taxes or benefits, pay workers’ compensation premiums or benefits, withhold federal income taxes or withhold and pay social security and Medicare taxes. A genuine independent contractor also does not have protection under federal or State anti-discrimination
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Photo courtesy of Renea I. Saade
Renea I. Saade
employment laws or wage and hour laws (i.e., minimum wage or overtime rules) other workers are afforded. For these reasons, one can easily see why working with an independent contractor is more appealing to a company than hiring a new employee, particularly when companies are making concerted efforts to keep overhead costs as low as possible.
A Growing Trend
According to a 2005 study by the Bureau of Labor Statistics, more than 10 million American workers are classified as independent workers. Unfortunately, independent contractors are not the easy fix they appear to be. It is difficult for a company to create
a legitimate independent contractor relationship with a worker. Labeling the worker an “independent contractor” does not suffice. Even entering into an “independentcontractor agreement” with the worker is not enough to legally establish a bona fide independent-contractor relationship. In order to have an authentic independent-contractor relationship recognized by law, certain circumstances surrounding the working relationship must exist. If the working relationship does not meet the criteria set out by applicable State or federal law, the company is not legally entitled to treat the worker as a nonemployee. Based upon a comprehensive 2000 study commissioned by the U.S. Department of Labor, up to 30 percent of employers misclassify at least some of their workers. In light of the recent events in our country’s economy, that percentage has likely substantially increased. The failure to create a legally recognized independent contractor relationship can have disastrous consequences. If a regulatory federal or State agency decides a company has misclassified workers as independent contractors (when they were in fact employees), the company is usually obligated to pay back wages (which can include overtime pay) for hours worked, retroactively provide certain benefits, pay overdue payroll taxes and workers’ compensation premiums or benefits, and can be required to pay lost wages
www.akbizmag.com • Alaska Business Monthly • March 2011