Employees vs Independent Contractors USA
Updated as of 2019
The past decade, particularly during the years of the Obama Administration, has seen an increased administrative focus on potential independent contractor misclassifica-
tion by the U.S. Department of Labor (“DOL”) and the Internal Revenue Services (“IRS”). Independent contractor misclassification is a nationwide issue, spanning all industries – both on-demand and more traditional business models, and all regions. Commonly cited industries include: transportation, ride sharing, janitorial, food services, IT services, courier services, day care, commercial cleaning, and startups. The DOL estimates that approximately 3.4 million workers in the U.S. are misclassified as independent contractors resulting in a lack of employee entitled benefits and protections, as well as an approximate 3.4 billion U.S. treasury revenue loss in Income Tax, Social Security, Medicare, and unemployment insurance trust fund contributions.
Employer risks resulting from independent contractor misclassification include:
i. Liability for unpaid employment taxes
• past federal payroll taxes (3 years back, or more)
• state payroll taxes
• up to 100% penalty—if willful failure
• income tax not withheld
• trust fund recovery penalty for responsible persons
ii. Failure to pay minimum wage and overtime
• recovery by administrative authorities or civil litigants of unpaid minimum wage/ overtime
• liquidated damages (100 % percent penalty)
• application of damage model to all workers in same job, not just individual worker
- i.e. liquidated damages paid to all workers in the postion misclassified as independent contractor.
• DOL supervision over payment of wages
• attorneys’ fees and cost
iii. Unfair labor practices liability under the National Labor Relations Act
iv. Immigration liability to the extent employers hire non-U.S. citizen workers as indepen-dent contractors to avoid verification of their citizenship status or obtaining of proper work visas.
v. Exposure to claims for coverage under employee benefit plans (Note: No statute of limitations)
The distinction between employees and independent contractors is defined somewhat
differently depending on the statutory context. Key legislation relating to independent
contractor misclassification includes:
- IRS: U.S. Tax Code (federal income tax withholding)
- U.S. Department of Labor:
- FLSA (Fair Labor Standards Act – minimum wage and overtime);
- FMLA (Family and Medical Leave Act);
- ERISA (Employee Retirement Income Security Act)
- State Unemployment Laws/Agencies
- State Workers’ Compensation Laws/Agencies
- State Income Tax Withholding
- Federal Anti-Discrimination Laws (Title VII, ADA, etc.)
- State and Local Anti-Discrimination Laws
- NLRA (National Labor Relations Act)
- IRCA (Immigration Reform and Control Act)
In September 2011 the DOL announced its “Misclassification Initiative” 1 – a program designed to establish joint/coordinated efforts between the DOL and the states. Since 2011, 35 states have signed a Memorandum of Understanding with the DOL and have passed bipartisan legislation to limit independent contractor misclassification. This form of state legislation typically includes: increased penalties for independent contractor misclassification, more stringent independent contractor status testing, and estab-lishment of a state task force to address independent contractor issues. As a result of this joint initiative between the DOL and the state legislatures, in 2015, DOL investiga-tions resulted in $74 million in back wages for more than 102,000 workers. It should be noted that during this same period there has been no new federal legislation addressing independent contractor misclassification.
With the transition to a new Presidency and new leadership in US administrative agen-cies in 2017, it is possible that a more pro-employer direction will ultimately take hold in interpretation of the relevant statutes and regulations.