Does your business have employees or do you use independent contractors? Maybe it is a combination of both? The misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers, and even the entire economy. Employers need to be very careful and absolutely certain when classifying a worker as an independent contractor over an employee. There are serious repercussions for incorrectly identifying the worker.
Misclassifications of workers as independent contractors rather than employees is a growing problem in Iowa, and with the steadily rising numbers of the Iowa workforce, especially in the construction industry where the distinction is often blurred, we may likely see this trend continue. However, that does not mean there is no solution for your business.
While often paid the same and may not seem like a big deal, there are many reasons the classification needs to be made correctly. Fortunately, there are guidelines to follow to ensure you are not misclassifying an employee as an independent contractor or vice-versa.
Reasons to Avoid Misclassifications
Whether done intentionally or unintentionally there are some obvious reasons to avoid misclassifying a worker as an independent contractor rather than an employee. When doing so you fail to pay taxes on the workers, you fail to provide the worker with workers compensation coverage, and you fail to follow wage, contractor registration, labor and other employment laws. Outside of the serious legal ramifications you may face for any of the above, you are also hurting workers and law-abiding businesses who do not misclassify workers.
Any misclassifications of a worker as an independent contractor rather than an employee may bring about potential lawsuits. For instance, if the worker is negligent on the job site, as an employer you may or may not be liable for the harmed caused by that worker depending upon their classification.
However, intentionally misclassifying workers is strictly illegal and the employer will face a myriad of legal issues. An employer who intentionally misclassifies a worker as an independent contractor can be liable for including by not limited to the following laws: unemployment, income tax, workers’ compensation, wage payment collection, contractor registration, and federal overtime and minimum wages.
Knowing the Difference
Knowing that an employer who intentionally misclassifies a worker faces not only penalties and fines but possibly criminal charges, it is good to be able to spot the difference between independent contractors and employees. While not entirely inclusive, a good rule of thumb for you to consider is how much control do you have over the worker? Meaning do you control the work to be done and, more specifically, how the work is to be performed by the worker. The more degree of control you have the better evidence the worker is an employee. If the worker has more control over how the work is performed they may be an independent contractor. Although they may be paid the same, you must withhold income tax, Social Security and Medicare from wages of employees while you do not for an independent contractor.
If you are wondering whether your workers should be classified as employees or independent contractors, the Internal Revenue Service provides a useful resource for the distinctions. Further, if you may be facing any of the issues herein, we recommend that you consult with an attorney.