The consequences of independent contractor misclassification vary, but can include fines for employers and additional taxes.
The “damages for misclassification of employees” is a legal issue that can occur when an individual is classified as an independent contractor instead of an employee. This can lead to a variety of problems, including missed payroll taxes and penalties.
Employees have been misclassified as Contractors who work for themselves, also known as freelancers, contractors, 1099 workers, temps, and project workers, by an increasing number of businesses in recent years.
To save money on labor and avoid legal duties, some corporations misclassify personnel as Contractors who work for themselves.
The independent contractor relationship may benefit both employers and employees, and many contractors are appropriately categorized. Some companies, on the other hand, purposefully misclassify personnel as Contractors who work for themselves in order to save money on labor and avoid legal liabilities. This has resulted in issues such as a loss in worker wage and hour rights, fewer tax revenues, and an unequal playing field for firms that correctly categorize employees.
Because there is no one criteria for determining whether a person is an employee or an independent contractor, the subject is complex and often comes up in government enforcement proceedings and class action lawsuits. Workers who believe they have been misclassified as Contractors who work for themselves might initiate a lawsuit against their company to recover lost salaries and other benefits.
ClassAction.com can assist you if you believe you have been incorrectly categorized as an independent contractor. To discover more about your legal options, schedule a Free Case Evaluation.
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Employees vs. Contractors who work for themselves
Being a self-employed individual isn’t always a terrible thing. Many individuals choose contract employment because it gives them the independence and flexibility of working for various customers without having to report to a “boss.” Contractors who work for themselves cost 20-30% less than employees, expose employers to fewer lawsuits, and provide employers greater flexibility in hiring and dismissing people, which is especially crucial for organizations with unpredictable workloads. Contractors may also be more efficient than new workers since they generally specialize in a certain field.
There is usually no reason for a disagreement as long as both the worker and the company gain from the freelancing arrangement. When contractors are considered as workers but do not get the extra perks that come with being employees, problems emerge.
The table below illustrates some of the most significant legal distinctions between Contractors who work for themselves and employees.
| Employees | Contractors who work for themselves |
| Form W-2 earnings are submitted to the IRS. | Form 1099 is used to report earnings to the IRS. |
| Unemployment and workers’ compensation premiums must be paid by businesses. | Businesses are exempt from paying unemployment and workers’ compensation premiums. |
| Required to be paid at least the minimum wage | It is not necessary to be paid the minimum wage. |
| If you work more than 40 hours in a week, you must be compensated with overtime pay. | Working more than 40 hours in a workweek is not necessary to be compensated with overtime pay. |
| Employees are entitled to health insurance and pension plans via their employers, as well as sick and vacation pay, medical leave, food and rest breaks, and expenditure reimbursement. | Health, pension, paid time off, lunch and rest breaks, medical leave, or expenditure reimbursement are not available. |
| Employer pays 12 percent of employee’s FICA taxes (Social Security and Medicare tax) | FICA taxes are paid in full by the contractor. |
| Under the National Labor Relations Act, you have the right to be represented by a labor organization. | The National Labor Relations Act does not apply to this situation. |
| Anti-discrimination and anti-harassment laws protect you. | Anti-discrimination and anti-harassment rules aren’t in effect. |
| Whistleblowers should be protected from reprisal. | There are no safeguards in place for whistleblowers. |
| Disability and unemployment insurance benefits are available to you if you meet certain criteria. | Neither disability nor unemployment benefits are available to you. |
Consequences of Workers Being Misclassified
Misclassifying employees as Contractors who work for themselves produces significant costs for workers, law-abiding businesses, and the economy. Specific costs include:
- Lower earnings and fewer benefits: The U.S. Government Accountability Office (GAO) reports that Contractors who work for themselves and other so-called “contingent workers” earn less per week and per year compared to employees. Non-employees are also less likely to receive work-provided benefits.
- Less economic security: Lower income and unreliable work for Contractors who work for themselves result in economic insecurity. This, in turn, leads to higher utilization of public assistance.
- Employer misclassification costs the federal, state, and municipal governments billions of dollars per year in missed tax income, as well as decreased Social Security, Medicare, and unemployment insurance payments.
- Unfair competition: Because misclassification decreases labor expenses, corporations that misclassify employees have a competitive advantage over companies that correctly classify people. This allows illegal firms to outbid legal ones, lowering overall pay and labor standards.
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Workers Who Are Frequently Misclassified
Contractors who work for themselves make up approximately 7-8% of the workforce. Studies estimate that 10 to 30 percent of employers misclassify their employees as Contractors who work for themselves.
Misclassification is common in app-based firms that depend on contract labor, such as Uber, Lyft, Grubhub, Homejoy, and TaskRabbit. Many of these businesses are presently facing litigation seeking to reclassify 1099 individuals as employees.
Other workers that are commonly misclassified as Contractors who work for themselves include:
- Workers in the construction industry
- Installers of cable and internet services
- Drivers of delivery vehicles
- Truckers
- Nurses
- Workers who provide health care at home
- Janitors
- Backstage crew members and stage hands
- Caterers
- Workers in the oil and gas industry
- Staff at a hotel or motel
- Landscapers
- Personnel in charge of security
- Drivers of car services and limousines
Identifying the Difference Between an Independent Contractor and an Employee
Worker misclassification has been identified as a severe issue by the Occupational Safety and Health Administration, the Internal Revenue Service (IRS), and numerous state workforce agencies, who have launched aggressive enforcement operations to combat it. Workers are also becoming more aggressive in filing misclassification cases and holding employers responsible as they become more aware of the problem.
The employment status of a worker is determined by no one criteria or test.
Despite the fact that eliminating worker misclassification is a national goal, determining whether a person is a contractor or an employee is a difficult subject with no simple solution.
A worker’s status is determined by no one rule or test. All facts important to the worker-employer relationship must be evaluated, according to the Supreme Court. However, the facts to be evaluated are incongruent since various authorities use different criteria. The Occupational Safety and Health Administration, for example, has a six-factor “economic realities test,” but the IRS employs a 20-factor test and the California Department of Industrial Relations employs an 11-factor test.
The Fair Labor Standards Act and Employees
The Occupational Safety and Health Administration’s decision is significant because employees must have a “employment connection” with their employer in order to be eligible for minimum wage and overtime benefits under the Fair Labor Standards Act (FLSA).
“Employ” is defined by the Fair Labor Standards Act (FLSA) as “to suffer or let to labor.” This wide definition is meant to cover as many employees as possible with FLSA minimum wage and overtime benefits.
In addition to the “suffer to be permitted to work” definition, the Occupational Safety and Health Administration employs a six-factor “economic realities” test:
- The degree to which the task produced is a critical component of the employer’s operations
- The worker’s profit or loss potential is determined by his or her management abilities.
- The amount of money invested in facilities and equipment by both the employer and the employee.
- Whether the task at hand necessitates the use of particular abilities and initiative.
- The long-term viability of the employee-employer relationship
- The extent to which the employer exerts control and the type of that control
Again, there is no one element that determines a worker’s standing. The question is whether the worker is economically reliant on the company or runs his or her own firm, taking into account all aspects.
The difference between employee and independent contractor was recently clarified by a DOL Administrator’s Interpretation. The Interpretation emphasizes the broad extent of the FLSA’s employment categories, stating that “most workers are employees under the FLSA’s broad definitions.”
Misclassification Lawsuits Against Independent Contractors
Workers who feel they’re wrongly classified as Contractors who work for themselves don’t have to sit idly by and wait for the government to intervene on their behalf.
Workers may take things into their own hands by initiating a class action lawsuit against their employer, despite regulatory authorities clamping down on corporations that misuse the independent contractor business model. A class action lawsuit permits employees who have been wrongfully categorized to sue their company for unpaid salaries, business costs, and other employee perks. Individual worker misclassification lawsuits are also feasible.
During a Free Case Evaluation from ClassAction.com, learn about all of your legal choices and how a lawsuit may assist.
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Sources:
Occupational Safety and Health Administration
Fact Sheet 13 from the Department of Labor
Professional Employees Department
Project on Employment Law in the United States
Pepper Hamilton LLP is a law firm based in New York City
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The “1099 misclassification” is a legal term that refers to the practice of classifying workers as independent contractors when they are actually employees. This can have serious consequences for both employers and employees, as well as the IRS.
Frequently Asked Questions
Can an independent contractor sue for misclassification?
A: Yes. An independent contractor is an individual who provides services to a company or organization under contract, but not as part of the regular workforce. If they have been misclassified and are now considered employees instead, then they can sue for wrongful termination in federal court (under Title VII), which would allow them to seek back pay and damages
What is the penalty for classifying an employee as an independent contractor?
A: If an employee is classified as an independent contractor and not granted the wage protections that contractors would otherwise be owed, their employer will typically face a penalty of 30 days pay for every month they fail to provide.
What penalties might an employer face for misclassification?
A: An employer may face penalties if they misclassify an employee. These can vary from fines to potential criminal charges, depending on the state in which the company is operating.
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