The benefits of contracting with independent contractors instead of hiring employees are many: flexibility, no taxes or benefits owed, no overtime, no employment discrimination risk, no onerous employment requirements that keep increasing, no health insurance requirement, etc. But as one recent client found out, if you misclassify your workers as independent contractors when they are actually employees, the cost is huge.
How bad was this classification error? It cost them over $250,000 in unpaid employment taxes, overtime, penalties and interest! Unfortunately, they sought our representation after it was too late, so we couldn’t reduce the loss. Another recent Department of Labor (DOL) lawsuit resulted in a $1.3 Million loss to a company which misclassified its employees as independent contractors.
As we have worked with our clients in this area, we have found there is a lot of confusion and misinformation out in the marketplace. It often takes the form of employers “laying off” employees and then “rehiring” them as “independent contractors” so the employer can save tax and benefit costs. This area of employee vs. independent contractor is fraught with danger. And, the IRS has increased its enforcement activities in this area.
Further complicating the issue is the fact that there are actually three different standards or tests being used to determine whether a worker is an employee or independent contractor. Illinois Courts use a common law “right to control” test, the DOL, under the Fair Labor Standards Act, uses an “economic reality” test, and the IRS uses a “20-factor test.” All these tests have one thing in common: they seek to determine the level of control the employer exercises over the activities of the worker. Are you confident that your classifications will pass? Failure on even one of the tests means costly consequences for your business.
Want to know more about these three tests? Download a FREE summary sheet further explaining the different tests or, if you prefer, schedule a consultation with Rich Payne to discuss your situation. If you have any question at all whether or not you are blurring or crossing the line between employee and contractor, you should contact us today.
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