Classification of Workers:
Independent Contractor versus Employee
Business decisions about classifying workers as independent contractors rather than employees are often challenged by any of various government agencies with potentially devastating effects on the business. At the federal level, misclassifying an employee as an independent contractor can result in huge liabilities for unpaid withholding taxes and penalties. The opposite error, misclassifying an independent contractor as an employee, can cause disqualification of a retirement plan. In New York State, misclassification of an employee has implications for New York state withholding tax, Workers’ Compensation and Disability Insurance liability, and Unemployment Insurance tax liability. These liabilities are administered by different agencies or divisions, each of which may investigate and make a determination about the status of any of your workers, and then share its finding with other agencies.
Whether a worker is an independent contractor or employee depends largely on the degree of control the business has over the way work is performed. In most cases there is no black and white test. The determination is made in light of all the facts and circumstances.
Businesses should consult counsel before they hire to ensure they are classifying new workers correctly. If your business receives a notice from any government agency inquiring about the status of someone you have hired, you should not attempt to respond to the notice of your own. Quickly retain counsel to respond to the notice and to represent you in any proceedings that touch on the classification of your workers. Do not rely on your accountant’s advice, nor on casual legal advice. Regardless of the size of your business, there is too much at stake to classify your workers the wrong way.
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