Independent Contractors – Keeping it Real

Real independent contractors are easy to identify.  They are hired to perform a specific project, they bring their own tools, they have their own business cards, and they send you an invoice when the work is done.

If you hire people to perform ongoing work for your company, tell them when to show up and what to do, those people are not independent contractors.

I am oversimplifying things to make a point: the concept of “contract labor” is overused in the construction industry.

Contrary to popular opinion, hiring people as “contract labor” is not a legal option if you control when, how and where they perform the work.  You can’t fix the problem by having each individual sign an independent contractor agreement.  Government authorities do not have to accept your paperwork: they will look at the reality of the arrangement and decide whether there is an employer-employee relationship.

Detailed information on how independent contractor status is assessed by the Internal Revenue Service (IRS) and the Texas Workforce Commission (TWC) is available on the TWC website.

Some employers have misused the “contract labor” concept for a long time and are reluctant to change.  Savvy employers are looking closely at this issue, however, because the risks of misclassification are severe:

1. Tax Audits

The IRS and TWC see misclassification as an attempt to avoid employment taxes.  When an employer is audited and misclassifications are found, the employer will owe back taxes and interest, and may owe penalties as well.

Audits are most commonly triggered by a worker who has been terminated or laid off, and has applied for unemployment benefits.  If he or she is not listed as an employee in the employer’s quarterly reports, a TWC tax audit will result.  The audit will cover the employer’s entire operations, and if there are systemic violations, the amount owed can add up quickly.

2. Wage and Hour Claims

The Department of Labor (DOL) sees misclassification as an attempt to avoid paying overtime.  DOL audits are often triggered by an anonymous worker complaint.

The DOL has a Misclassification Initiative focused on this issue, and it now coordinates enforcement with the IRS.  As such, an employer with misclassification problems might face a back wage assessment from DOL due to unpaid overtime, and might also owe back taxes to the IRS.

In addition, the fastest growing type of employment litigation is wage and hour litigation under the Fair Labor Standards Act.  If a group of individuals has been misclassified, they can pursue a “collective action,” meaning that the lawsuit involves multiple plaintiffs with similar claims.  These lawsuits are complicated, expensive, and well worth avoiding.

3. Immigration Issues

Companies who hire workers as employees, and then properly complete the I-9 process, know that their workers are authorized to work in the United States.

On the other hand, companies who hire “contract labor” and do not complete I-9 forms may be unintentionally hiring illegal aliens.

The Department of Homeland Security, through its Immigration Customs Enforcement (ICE) department, has increasingly focused its immigration enforcement efforts on employers.  Employers who “look the other way” and hire unauthorized workers run the risk of substantial civil and criminal penalties.

Classifying workers as “contract labor” may save money in the short term, but misclassification is an unacceptable risk.  Prudent employers should review their independent contractor arrangements and reclassify workers who appear to be employees.