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The Misclassification Risks of Hiring Independent Contractors

Corporate Counsel (03/29/12) Shannon Green

While companies see an advantage in hiring independent contractors when they are unsure of their staffing needs or their budgets are tight, they first should weigh the risks, says Emily Sanford Johnson, labor and employment attorney with United Parcel Service Inc. Johnson says that despite the flexibility, lower costs, and specialized skills associated with hiring independent contractors, employers face significant tax consequences at the state and federal levels if they misclassify these employees. She adds that employers face liability associated with overtime and minimum wage payment violations, employee benefits, pension plans, workers’ compensation, and state meal and rest period laws, among other things. The U.S. Department of Labor, along with states, is cracking down on worker misclassification.

Johnson says employers could be scrutinized when they file unemployment or workers’ compensation claims with the state or when employees shift from W2 status to 1099 status in the same year at the same company. Johnson adds that to avoid charges of misclassification, companies should not tightly control how the independent contractor does his or her job, pay worker per project rather than hourly or via salary, and stipulate that failing to complete the project as per the agreement will result in consequences. “If they are going to get paid regardless, it looks more like they’re an employee,” she says.