Independent Contractors and the Dangers of Misclassifying Employees

A review of state-level studies by the National Employment Law Project found that between ten and 30 percent of workers may have been misclassified by their employers as independent contractors instead of employees. These high numbers extend to North Carolina. A 2018 North Carolina report identified over 8,000 misclassified workers in the fiscal year 2017-2018.

Although workers are considered employees by default, some employers classify their workers as independent contractors to avoid costs like payroll taxes, unemployment taxes, and premiums on workers’ compensation insurance. When an employer misclassifies its workers, it can face serious consequences from government regulators.

How Do Employers Determine Whether a Worker Is an Employee or an Independent Contractor?

Some employers wrongly believe that they can classify a worker as an independent contractor simply by having an independent contractor agreement with the worker. But state and federal regulators only consider an independent contractor agreement as one factor when determining the true nature of a worker-employer relationship.

While different agencies employ different tests to determine worker status, all the tests focus on the right of the employer to control the worker’s performance. If an employer retains the means to control how a worker does their job, where they work, and when they work, an employer should consider that worker an employee rather than an independent contractor. 

What Are the Penalties for Misclassifying a Worker?

The penalties for misclassifying a worker as an independent contractor vary depending on which agency investigates the misclassification. If taxing authorities investigate the matter, an employer could face penalties, including paying back payroll taxes, plus interest and fines.

When the state or federal department of labor is involved in a misclassification matter, it can order an employer to compensate a misclassified worker for the backpay the worker is owed under wage and hour laws (including minimum wage and overtime) plus interest.  They may also impose fines for failure to comply with the wage and hour laws. 

Tips to Avoid Misclassifying a Worker

Employers can help themselves avoid misclassifying workers by keeping the following tips in mind:

• Remember that employment laws are intended to protect workers. As a result, the law favors classifying a worker as an employee. The employer must overcome this presumption and prove the worker is properly classified as an independent contractor.
• Avoid classifying workers core to your business operations as independent contractors. Instead, independent contractors should include workers with specialized skills to help your business with non-core needs, likes building your company’s website.
• Courts and agencies typically focus on the control that an employer exercises over a worker. When you hire an independent contractor, you should only evaluate the end result of the contractor’s work. Don’t try to control the details of how the worker accomplishes the tasks they’ve been hired to perform. 

How a Business Lawyer Could Help

When your business is hiring workers and deciding whether to classify them as employees or independent contractors, a business lawyer can help by:

• Helping you understand the applicable employment laws and worker classification tests
• Reviewing proposed job descriptions to advise whether the role can be performed by an independent contractor or should be handled by an employee
• Drafting independent contractor agreements for your business to establish rules and obligations that preserve the independent contractor relationship
• Explaining your legal options and potential outcomes if your business is accused of misclassifying workers

If you have questions about how your business should classify its workers and what your company’s legal options are if you’ve misclassified workers, call or contact Mullen Holland & Cooper. Get a confidential case evaluation with an NC employment lawyer who can answer your questions about how our firm can help your business.