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Misclassified Workers Can Lead to Trouble With the IRS, the DOL and the Courts

The current economic and financial crisis  has affected every industry in the United States.  During these times employers, seeking to limit or decrease operational costs, may innocently follow advice which leads to violations of tax and labor laws.  For example, many workers are hired as “independent contractors.”  To paraphrase, independent contractors are statutorily defined by the IRS and DOL as workers that are not considered full employees, but project-based workers.  As such, the employer is not responsible for providing benefits (including health, social security or wage benefits) to the worker.

One example of a true independent contractor is your gardener.  You pay the gardener to come to your home on various days of the month to cut the grass.  You and the gardener agree to the cost of providing you this service.  The gardener also uses his own tools and equipment to complete the assigned task.

If, however, the employer dictates all the terms and conditions of employment or if the employer treats the independent contractor in the same manner as the employer treats full-time employees (including assigning dates, location and manner in which the worker must accomplish a task), then that worker is not classified as an independent contractor for IRS and DOL purposes.  In this scenario,  the worker would be classified as an employee.  As such, the employee would be entitled to workers compensation benefits, social security benefits and overtime wages.

So, the employer made a mistake.  No harm, no foul, right??  Wrong!

If an employer is found to have misclassified its employees as independent contractors, the employer would be liable for back taxes, back pay and several fines.  Moreover, misclassified workers can bring independent and private law suits for back taxes and back pay.  In those instances, the law allows for the worker to recover the back taxes, back pay and his or her own attorneys’ fees and costs.  Thus, misclassifying a worker can potentially be tantamount to a very expensive mistake.

The IRS recently created the Voluntary Classification Settlement Program (VCSP) that provides the employer an opportunity to reclassify its workers as employees for employment tax purposes.  It also significantly reduces the fine that the IRS assesses employers when they have misclassified their employers.

To qualify, the employer must:

Not currently be audited by IRS, DOL or a state agency re misclassification

If you are concerned that you might have misclassified workers as independent contractors instead of employees, seek legal advice.  For more information on the VCSP, log onto the IRS website at www.irs.gov and search for VCSP in the search box on the top right hand of the screen.

This document is issued for informational purposes only and is not intended to be construed or used as legal advice. Infante Zumpano is not responsible for any loss or damage occasioned to any person or entity in connection with acting on or refraining from action as a result of any material in this publication. The hiring of a lawyer is an important and crucial decision that should not be made lightly or solely on advertisement.