Legal: Understand employee classifications

Q. How do I classify someone providing services for my business?  

A. Business owners often inform me that their workers are paid as either independent contractors (1099) or employees (W2) based solely on their or the worker’s preference.  

While a worker or business owner may, for example, prefer an independent contractor classification – and the corresponding ability to have write-offs and not incur payment of employer related taxes, respectively – whether an employer/employee relationship exists is not up to the business owner or the worker. 

Rather, appropriate classification depends on the specific facts and circumstances unique to each individual worker-business relationship.  

Who cares? The consequences for misclassification are dire, with serious financial penalties for non-compliance that can be pursued by various regulatory bodies such as the Internal Revenue Service and Department of Labor – along with plaintiff attorneys, as employees and independent contractors are afforded very different rights under the law. 

For example, unlike independent contractors, employees are entitled to (i) employer tax contributions; (ii) certain protections such as minimum wage, worker’s compensation insurance, overtime payment (if not exempt) and workplace condition safety oversight; and (iii) certain benefits, (if applicable), such as (unpaid) leave under the Family & Medical Leave Act and health insurance contributions.  

In certain industries such as health care, worker classification will even determine how they can legally be compensated. For example, under the Federal Anti-Kickback Statute it is considered a criminal violation for an independent contractor to pay or be paid in exchange for the referral of business that is reimbursable by federal health care programs, but bona fide employees are exempt from that prohibition.  

Thankfully, various regulatory bodies have articulated criteria to help determine if a worker should be classified as an employee or independent contractor, which largely focus upon the amount of control exercised over the worker, permanency of the relationship, as well as risk of loss. All business owners should be aware of these tests to ensure new hires are properly classified upon commencement of the relationship to avoid serious penalties. 

Michael Silverman, Esq., is with Silverman Bain, LLP. Reach him at michael@silvermanbain.com.