Metro Articles

Employee or Independent Contractor?

Nathan Smith Wednesday, May 5, 2010

Is that cable installer an employee or an independent contractor?

Is your wife's hairdresser an employee of the salon or an independent contractor? How about that package delivery man, or the construction worker- employee or independent contcator?

The confusion is easy, but the reason behind it is crystal clear. Avoiding taxes, worker's compensation premium and unemployment costs are some of the biggest reasons many employers today are putting more and more workers on 10-99's. The Fair Labor Standards Act, which sets the law for wage and hour laws, has yet to produce a clear distinction between who should be W2 and 10-99. In fact, The Labor department says 1 in 3 employees in the work force today are incorrectly classified - some by intent, others by error. Part of the problem stems from the lack of a consise description of what is an employee and what is an independent contractor.

But misclassifying employees as indendepdant contractors could come at a steep price. The Obama administration plans to crack down on this growing practice. The U.S. Department of Labor's 2010 budget calls for an additional 250 wage and hour investagators, more than doubling the resources of this once overlooked dpeartment. The IRS has also stepped up by adding 200 employment tax auditors. Their intent to uncover wrongdoing and clarify this important distinction is slowly being brought to the spotlight.

James Koren, a district director of the Wage and Hour Division of the U.S. Department of Labor says "More and more businesses believe they can call someone an independent contractor because it's cheaper not to pay employment taxes or worker's comp taxes, but they frequently find themselves owing back wages and back taxes, too."

Independent contractors are also not protected by minimum wage, overtime, and anti-discrimination laws, not to mention subsidized health insurance.

The government has taken great strides in preventing and punishing those who file fraudulent work comp claims, but it plans to crack down just as hard on employers who intentionally misclassify employees to cut down on overhead. If the IRS finds a classification violation, an employer might be liable for the unpaid taxes, insurance premium payments, severance pay, and the payment of other benefits the worker should have been entitled to.

Painting with a broad brush, workers are employees if someone controls when and where they do their work. Independent contractors are in business for themselves and can get customers on their own. But it's the cloudy language of the Wage and Hour divison's "seven significant factors" that brings the confusion. If you find yourself in the middle of this issue, it would be wise to arm yourself. We recommend you talk to your lawyer or legal counsel. You can also go to this website, and search for "independent contractor" to find relevant information, or call them at 866-487-9243. You should also take a look at the IRS's form SS-8, Determination of Worker Status and search for "independent contractor webcast" on their website at

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