Employee or independent contractor? If only that were an easy question to answer. According to the Economic Policy Institute, between 10 and 20 percent of employers misclassify at least one worker as an independent contractor. And as gig economy work is expected to explode in the coming years, the misclassification rate is likely to increase.
So, what happens when a worker is misclassified? Should-be employees miss out on important protections and benefits, such as overtime pay, worker’s compensation insurance and unemployment benefits. The government misses out, too, on billions of dollars in tax revenue created by income taxes, Social Security and Medicare taxes and unemployment taxes.
Employers also suffer, since misclassification can create competitive disadvantages for the ones that play by the rules. Improperly classifying employees also can be costly to employers. The severity of the consequences depends on whether the IRS and the Department of Labor think the misclassification was accidental or intentional. The former carries small penalties; the latter can be devastating—criminal charges and time served.
While it’s true that some employers knowingly exploit the rules of employment, studies show that many misclassifications stem from the confusion surrounding the criteria itself. The issue has gone all the way to the U.S. Supreme Court, multiple times, and each time they’ve determined there is no single rule or test for classifying a worker as an employee or independent contractor.
Bottom line, the government has given you lots of factors to consider. To help cut through the confusion, we’ve put together this easy-to-read table of the most essential criteria to help you arrive at the right status for your workers.