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Independent Contractor Designation Receiving More Scrutiny

Employers have found they can save money on payroll expenses by hiring independent contractors rather than full-time employees. Even as the economy has started to pick up, companies are still hesitant in their hiring practices. As a result, the Improper Independent Contractor Designation practice is increasing.

Independent contractors do not receive benefits and reduce paperwork burdens, since a company does not need to withhold income taxes, Social Security, Medicare or unemployment taxes. Another reason that some small business may be hiring more contractors is to avoid paying for employee’s health insurance under the new federal health-care law by staying below the 50-employee threshold.

Contractors may save an employer as much as 40 percent in labor costs according to a Michigan State University study. So, it is no surprise that employers are bringing on contractors. A payroll-management firm in Chicago that provides services for small employers has noted that the proportion of contractors on payroll has almost doubled in the past six years.

Partnership between federal and Illinois agencies seeks to combat practice

The Department of Labor and the Internal Revenue Service have taken note of the trend. In 2011 as part of a Worker Misclassification Initiative both agencies along with the Illinois Department of Labor agreed to work together and share information to go after companies misclassifying their workers. The crackdown is both a way to increase tax revenue and ensure the fair treatment of workers.

In January 2013, the IRS announced it would extend an amnesty program that allows employers to avoid penalties by admitting employee misclassification. The agency says that it has worked with approximately 1,000 employers, since initiating the program in 2011.

Not only do employees suffer when misclassified as contractors, employers open themselves up to costly audits and penalties.

Standard for correctly classifying workers

According to the Wall Street Journal, some state studies looking at the issue find that 10 to 60 percent of businesses misclassify workers as independent contractors. Many businesses blame the classification standard and argue that it is difficult to apply.

Under federal law, an employer needs to review the working relationship as a whole to determine the correct classification. For example, the degree of control and supervision exercised by the employer is important. It is usually greater for an employee than an independent contractor. Another key is that contractors usually submit a bid and decide how they complete work.

Increasing employer audits

Employers who are misclassifying employees to save money should be wary of audits. Through the agency partnership, government officials have a goal of investigating 6,000 employers. Already the government has discovered more than 11,400 misclassified workers and collected $9.5 million in back wages according to the Labor Department.

If you have concerns that your employer may have you incorrectly classified you as a contractor, contact an employment law attorney. Your employer may be denying you rightful benefits, but remedies exist.