Workers Compensation Rights

The Risks and Rewards of Utilizing Independent Contractors

In an increasingly competitive environment where every expense must be scrutinized, reducing your workforce and taking advantage of the cost savings of independent contractors can be very appealing. However, this is not something to be entered into lightly and employers must be aware of the increasing risks of classifying workers as independent contractors.

Benefits.
There are clear benefits to employers utilizing independent contractors. Employers are not responsible for the usual payroll taxes – unemployment tax, medicare and social security. Employers also save on health benefits, vacation time, sick leave and retirement benefits.

Risks.
However, along with the traditional risk of lack of direct control and direction over independent contractors, employers now must also consider the increasing risk that the IRS, state unemployment and workers’ compensation agencies, insurance companies or the courts may find that these workers were misclassified, leading to penalties for the employer. IRS and state workforce agencies are dramatically increasing their scope and scrutiny of companies who might be misclassifying employees as independent contractors. Recently, FedEx Ground was assessed $319 million in back taxes on the earnings of their drivers, whom FedEx treated as independent contractors but the IRS found to be common law employees.

The classification of workers can be difficult, made more so by the fact that law is enforced by different agencies, each using different criteria and with different reasons for making decisions regarding the same working relationship. The most important factor, however, is the employer’s right to control and direct the way the individual performs his or her work. Other factors can include the method of payment, whether the work is specialized or a part of the employer’s regular business, whether tools or supplies are provided, whether the individual is working for several principals, where the work takes place, and the right to discharge.

To give an idea of the complexity that can be involved it determining worker status – just take a look at just one of the agencies – the IRS. The IRS has recently replaced its long-standing 20-Common Law Factors Test. The new approach focuses on three categories: Behavioral Control – the right of the employer to direct how the worker does the work; Financial Control – who has the right to direct or control the business part of the work and the funding and expenses; and Relationship of the Parties – how do the parties perceive the relationship. (For more information see www.irs.gov, or Publication 1779 and 15-A). If you are still unclear whether your relationship qualifies as independent contractor status, either the business or the individual can file a Form SS-8 with the IRS. The IRS will review the facts and circumstances and officially determine the worker’s status.

Another risk with independent contractors is the potential legal cost. Because independent contractors are not covered by an employer’s workers compensation plan, utilizing independent contractors leaves open the possibility to personal injury lawsuits if workers suffer an injury on the job. Employers need to consider the potential cost of losing the protective shield that workers compensation provides.

Summary.
Reclassifying former employees as independent contractors may seem like a great way to help your business through tough economic times, but remember there are significant risks. Remember the old saying – “You can’t have your cake and eat it too.”

* Rachel Terpstra is an attorney with Parmenter O’Toole, PLC in Muskegon, Michigan. The comments in this article are not intended to be a substitute for legal guidance or advice for a specific situation.  You should obtain informed legal counsel to assist in your decisions relating to any issues which may be raised in this article.  For additional information regarding the above topic, Rachel can be reached at  231.722.5407.