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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.