Misclassified employees are often denied benefits and protections they are entitled to by law. Employers that mistakenly or deliberately misclassify workers to reduce costs and avoid the burden of certain employment laws can be liable for all back taxes plus any applicable penalties and interest.
Employee or Independent Contractor?
An independent contractor is someone who generally works independently and controls when and how they work. Under common-law rules, a worker is considered an employee if the business has the right to control the details of how the work will be done.
An employer’s classification of a worker is not definitive. The IRS, Minnesota Department of Revenue, Minnesota Department of Employment and Economic Development, and the Minnesota Department of Labor and Industry have the authority to make worker classification determinations. When determining a worker’s status as either an employee or independent contractor, the biggest consideration is the company’s degree of control.
The IRS considers factors of Behavioral Control, Financial Control, and the Relationship of the Parties to determine whether someone is an employee or independent contractor.
A worker is an employee when the business has the right to direct and control the work performed. Behavioral control categories are:
- Type and degree of instructions given, such as when and where to work, what tools to use, or where to purchase supplies.
- Evaluation systems to measure the details of how the work is done.
- Training a worker on how to do the job, including periodic or on-going training about procedures and methods is strong evidence that the worker is an employee.
A worker is an employee when the business has a right to direct or control the financial and business aspects of the work performed. The following indicate that the worker may be an employee:
- The business pays for or reimburses the worker for travel and business expenses.
- The worker is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time.
- The business provides tools, materials, and equipment.
The following indicate the worker is likely an independent contractor:
- The Worker has an opportunity for profit or risk of loss.
- The worker has a significant investment in the work.
- The worker offers services to the general public.
Relationship of the Parties
The relationship of the parties refers to facts that show how the worker and business perceive their relationship to each other. The following factors indicate that the worker is an employee:
- The worker has the right to quit without incurring liability.
- The business has the right to fire the worker.
- The worker has the right to receive employee benefits.
- There is a continuing relationship between the business and the worker.
- Services performed by the worker are a key aspect of the regular business activities.
- A written contract describes the relationship between the parties as employer-employee. Although a contract stating the worker is an employee is not sufficient to determine the worker’s status.
Why does it matter?
When workers are misclassified, it creates two significant areas of concern to state and federal governments. First, the workers may not be receiving protections granted by state and federal laws to employees, including wage entitlements, and benefits such as unemployment and workers’ compensation. Second, misclassification has tax implications because employers aren’t required to pay or withhold taxes for independent contractors.
Federal anti-discrimination laws generally do not protect independent contractors. The Minnesota Human Rights Act (“MHRA”), however, extends anti-discrimination protection to independent contractors. The MHRA’s definition of “employee” includes independent contractors who are commissioned salespersons. The MHRA also prohibits “business discrimination.” Under the MHRA, it is an unfair discriminatory practice for a business “to intentionally refuse to do business with, to refuse to contract with, or to discriminate in the basic terms, conditions, or performance of the contract because of a person’s race, national origin, color, sex, sexual orientation, or disability, unless the alleged refusal or discrimination is because of a legitimate business purpose.” If you think that a business is refusing to do business or contract with you because of your race, national origin, color, sex, sexual orientation, or disability, contact an employment discrimination attorney.
If you suspect that you are being misclassified, please contact a Minnesota Employment Attorney. The experienced employment attorneys at Schaefer Halleen can help you get the benefits you’re entitled to. Contact us for a free consultation.