Many employers use 1099 independent contractors (ICs) to reduce the costs associated with workers. By utilizing ICs, employers avoid paying the employer share of payroll taxes, the expenses associated with Workers’ Compensation and unemployment, employee benefits costs, and the time and money associated with administering various employment tasks.
However, employers can’t just call a worker an IC to avoid those costs. The worker must meet certain criteria to qualify as an IC.
The Obama administration has been particularly concerned about cracking down on the misclassification of ICs who really should be W-2 employees.
Worker misclassification robs both state and federal governments of taxes and unemployment funds. Up until now, most of the news about worker misclassification enforcement has come out of the IRS. But according to a Forbes column titled “Independent Contractor Enforcement: There’s More Than The IRS To Fear” by attorney John Thomas, the U.S. Department of Labor (DOL) has stepped up its own enforcement efforts against the misclassification of independent contractors.
This is all part of the Misclassification Initiative in which the DOL announced they would work with the IRS and share information to crackdown on worker misclassification.
This effort has resulted in several recent high dollar judgments against employers. Most recently, the DOL announced it had recovered more than $1 million in back wages for workers at a Kentucky-based cable installation company. The Forbes column warns that many more DOL investigations are being conducted now.
It is important that you educate your clients of the ever-increasing focus on worker misclassification. Encourage them to look at their IC workforce and determine if those workers truly qualify as ICs. In general, government agencies will be looking at the degree of control a company has over a worker and how financially dependent the worker is on the company when determining a worker’s correct classification. The best place to learn about correct IC classification is the IRS website.
Recruiters can help their client companies by offering to convert current 1099 ICs to W-2 employees. You can offer to put those workers on contract assignments and outsource their employment to a contracting back-office that serves as the W-2 Employer of Record.
That way, your clients can still escape the administrative and financial burdens of employing their workers without the risk involved with making them ICs.