Jul 2014

Employee or Independent Contractor?

Misclassifying an Employee Can Be an Expensive Mistake

In today’s modern, fast-paced, and often mobile workforce, knowing whether a worker is an employee or an independent contractor isn’t always easy. The days of a single worker spending his entire working life in one factory job are lost to history. Today, people move around much more often, switching jobs and careers far more frequently than previous generations.

Despite the evolution of the workforce, the IRS still classifies workers as either employees or independent contractors – and employers who misclassify workers can expect to pay a hefty price for their mistakes. In general, independent contractors are self-employed. They don’t enjoy benefits like sick days, personal time, health insurance, or workers’ compensation insurance. As a result, they tend to cost businesses less money, which might explain why so many businesses misclassify their workers. According to the Department of Labor, approximately 30 percent of all employers misclassify their employees as independent contractors.

The IRS 20-Factor Test for Employees vs. Independent Contractors

Although it’s not always easy to distinguish between an employee and an independent contractor, Missouri law provides employers with a list of 20 factors designed to help businesses properly classify workers. The 20-factor test is taken from the same test used by the IRS and modified by the Missouri court case, National Heritage Enterprises, Inc. v. Division of Employment Sec., 164 S.W.3d 160, 167­-74 (Mo. App. W.D. 2005). The 20 factors are as follows:

  • Instructions
  • Training
  • Integration (with the business, company, etc.)
  • Services rendered personally
  • Hiring, supervising, and paying assistants
  • Continuing relationship
  • Set hours of work
  • Full time required
  • Doing work on employer’s premises
  • Order or sequence set
  • Oral or written reports
  • Payment by hour, week, month
  • Payment of business or traveling expenses
  • Furnishing tools or materials
  • Significant investment
  • Realization of profit or loss
  • Working for more than one firm at a time
  • Making services available to the general public
  • Right to discharge
  • Right to terminate

Employers who knowingly misclassify workers as independent contractors face serious penalties, including fines between $50 and $1,000 a day per employee. In some cases, employers can even face jail time. According to the Missouri Department of Labor and Industrial Relations, worker misclassification cost Missouri businesses $1.6 million in fines in 2013 alone. Employers must also pay penalties for unpaid workers’ compensation insurance and unemployment tax for each employee misclassified as an independent contractor. Additionally, in 2013 the federal government, prompted by the Obama Administration, funded an initiative to “detect and deter” employee misclassification.

Springfield, Missouri Business Law

At the Law Office of Randy L. Smith, LLC, our attorneys help businesses and individuals with a broad variety of legal needs. Call us today at (417) 841-2775 to speak to an attorney about your case.

This website has been prepared by The Law Office of Randy L. Smith, LLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.