July 24

Top 5 Myths of Independent Contractor Classification

I have had a wide variety of experience with independent contractor classification issues for years as both a business owner and attorney and I’m still surprised by how many people get it completely wrong when they decide to “1099” someone who should clearly be an employee. With the IRS and other agencies cracking down on independent contractor worker classification issues, this guide will steer you clear of the 5 most prevalent and dangerous myths.

Myth #1. “My business is fine…we use independent contractor agreements and our workers agree that they’re independent contractors.”

Reality: Having an independent contractor agreement with workers won’t prevent the IRS or government labor agencies from treating them as employees if the working relationship fails to meet the tests each agency uses to determine employee classifications. Lack of an independent contractor agreement is evidence that workers are employees, but having a contract–even if it clearly outlines both the intent of both the company and the worker to form a contractor relationship–will not protect the business.

Myth #2: “The IRS classified our workers as independent contractors, so I won’t be liable for any state or local labor agency employee regulations.”

Reality: State and local labor agencies use different classification rules than the IRS. Passing the “test” of one agency doesn’t ensure that another agency will classify the same workers the same way.

Myth #3: “Hiring workers as independent contractors is less expensive than hiring them as employees.”

Reality: To determine whether a worker is truly an independent contractor the IRS and other agencies look at a range of factors that include your ability to dictate how and where work is done, whether the worker does work for other companies, and whether you provide training and equipment. While you may save money on payroll taxes or benefits in the short run by using contractors, in the long run the lack of control, loss of focus, and inability to train contract workers can easily cost more than the expense of hiring those same workers as employees.

Myth #4: Even if a contract worker decides to sue me as an employee, I am protected if they signed a waiver or release.

Reality: By law, workers cannot waive their right to bring claims for a wide range of employment discrimination and wage and hour violations. If a worker has been improperly classified as an independent contractor they can still bring many claims regardless of what they may have agreed to in a waiver.

Myth #5: “I can terminate an independent contractor relationship at will.”

Reality: While this may be true under the contract you have, if your agreement with an independent contractor calls for you to be able to terminate them at will, this will weigh against you if you’re ever audited on a classification issue. The requirement for a specific project length and penalties if you terminate a project early help point to a true contractor relationship. The ability to terminate at will points to an employment agreement.