Misclassification of Workers as Independent Contractors

The misclassification of workers as independent contractors, when they should be treated as employees, continues to gain increasing attention from the federal and New York State governments. “Misclassification” refers to a worker who is an employee under the law, but is incorrectly classified as something other than an employee (usually an independent contractor). Most federal and state labor laws protect workers who meet the laws’ definitions of “employee.”

The United States Department of Labor supports the use of legitimate independent contractors, but when employers deliberately misclassify employees as independent contractors in an attempt to cut costs, everyone loses. Misclassification denies workers their legally protected rights as employees, and costs the governments money. The governments have made clear that their investigative and enforcement activities will increase, and that those activities can result in substantial monetary judgments against employers who misclassify.

The Department of Labor has indicated that the misclassification of employees as independent contractors “presents one of the most serious problems facing affected workers, employers and the entire economy. Misclassified employees often are denied access to critical benefits and protections to which they are entitled, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces.”

Misclassification is also costly to the government. As the Department of Labor has also written, “Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds. It hurts taxpayers and undermines the economy.” The Internal Revenue Service has made clear that an employer who classifies an employee as an independent contractor without a reasonable basis for doing so may be held liable for employment taxes for that worker.

In assessing whether a worker is an independent contractor, for tax purposes facts that provide evidence of the degree of control and independence fall into three categories:

  • Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, )
  • Type of Relationship: Are there written contracts or employee type benefits (such as pension plan, insurance, or vacation pay)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all of these factors when determining whether a worker is an employee or independent contractor.

The New York State Department of Labor has called misclassification (when “an employer treats people as independent contractors when they are employees”) a “tactic” used by some employers to avoid compliance with:

  • Unemployment insurance (UI)
  • Workers' Compensation
  • Social Security
  • Tax withholding
  • Temporary disability and
  • Minimum wage and overtime laws that protect

The State Labor Department also noted that misclassification “put[s] law‐abiding business at a competitive disadvantage, because they incur expenses for UI and Workers' Compensation for their employees” while the misclassifying employer does not.

To combat the excessive mischaracterization of workers as independent contractors, the federal Department of Labor started “The DOL Misclassification Initiative”, as part of which it entered into agreements with the New York State Department of Labor and the New York State Attorney General. Their shared goal is to provide clear, accurate, and easy‐to‐access outreach to employers, employees, and other stakeholders, and of sharing resources and enhancing enforcement by conducting joint investigations and sharing information consistent with applicable law.

To combat misclassification, New York’s Governor in 2007 created a Joint Enforcement Task Force on Employee Misclassification (JETF). JETF has staff from the state Department of Labor, the Attorney General's Office, the Department of Taxation and Finance, the Workers' Compensation Board, the Workers' Compensation Fraud Inspector General, and the New York City Comptroller's office. The stated goals of the task force are to address misclassification of workers, seek to end these “unfair practices”, and ensure workers and employers of “fair and equal treatment under the law.”

The JETF issues an annual report of its activities to the Governor. Through “joint enforcement sweeps” and other activities, in 2014 (the most recent year for which a report is available) JETF:

  • Identified nearly 26,000 instances of employee misclassification;
  • Discovered nearly $316 million in unreported wages; and
  • Assessed nearly $8.8 million in unemployment insurance

JETF conducted 83 sweeps in 2014, bringing the total number of sweeps conducted since JETF began to 290. On “nearly every sweep”, the sweep teams included investigators from the Department of Labor’s Unemployment Insurance and Labor Standards Divisions, the Department of Labor’s Office of Special Investigations, the Workers’ Compensation Board Bureau of Compliance, and the Workers’ Compensation Board Office of the Fraud Inspector General. All completed sweep cases in which misclassification was found were referred to the New York State Department of Taxation and Finance for assessment of state income tax owed. Completed unemployment audits were also sent to the United States Internal Revenue Service. In 2014, completed audits and investigations of businesses found through JETF sweeps:

  • Uncovered nearly $52 million in unreported wages;
  • Resulted in the assessment of nearly $1.6 million in additional unemployment insurance contributions; and
  • Revealed over 10,300 misclassified

The Task Force also reported that, in 2014, the NYS Department of Labor completed over 12,000 audits and investigations, finding over 133,000 misclassified workers and unpaid contributions due of over $40.4 million. The job categories showing the highest incidence of worker misclassification included, among others:

  • Professional, Scientific and Technical Services;
  • Administrative and Support Services;
  • Specialty trade contractors; and
  • Educational

The Task Force announced its intention to continue its activities in enforcement, outreach and coordination among agencies in the future.