Misclassification of Employees as Independent Contractors. What’s the Difference?

Our Award-Winning New York Employment Lawyer has represented many small businesses who have received a notice of audit from the NY Department of Labor (DOL). This audit can be a significant moment for small businesses who use freelancers, independent contractors, consultants and interns. It is prudent for companies to be represented by an experienced NY Employment Law Attorney because not only are the payroll tax consequences, there could also be a domino effect of other unintended consequences. If you have received a letter from the New York Department of Labor regarding an upcoming audit, contact our office to learn your options, potential legal exposure and determine best compliance practices. Unlike most employment discrimination, intent to violate the law is not a factor in misclassification cases - even well meaning companies who were ignorant of the law can face exposure and penalties.

Misclassification of workers is a significant issue for the state because, among other reasons, it deprives the state of employment-related payroll taxes and deprives workers of employee rights and protections. Your company could have been selected for several reasons which include but are not limited to an random audit or an due to an individual's complaint. Regardless of the reason for the audit, you should take immediate steps to prepare yourself for the audit and protect your business. The audit will include a fact specific analysis of whether your workers are employees or contractors. It is advisable for you to do your own internal audit or review with experienced counsel early in the process. Below are some of the factors that the State may consider in conducting its analysis regarding the classification of a worker.

No one factor is dispositive; rather a totality of circumstances is reviewed including but not limited to the degree of supervision, direction and control exercised over the worker's services. In general, an employment relationship exists when a company controls what will be done, i.e. the manner, means, and results. According the DOL, an employment relationship may be found if the Company:

• Directly Supervises the Work Performed and Sets the Work Schedule
• Engages the Worker to Perform Services That Are Integral to its Business Model
• Dictates Where, When and How the Work is To Be Performed
• Requires the Worker to Come to Your Office to Perform the Services
• Provides Equipment and Training to Complete the Duties
• Sets the Rate of Pay and Requires an Exclusivity of Services
• Requires Status Reports and Conducts Performance Reviews
• Requires the Worker to Personally Perform All Duties

How an individual is compensated is another indicator of worker status. Employees typically are paid a salary, an hourly rate of pay or a draw against future commissions with no requirement for repayment of unearned commissions. Employees may also receive certain fringe benefits, including an allowance or reimbursement for business or travel expenses.

In general, contrary to an employment relationship, independent contractors or consultants are free from: supervision, direction and control. The following are some factors that the DOL states are indicative of a contractor role:

• The worker has an established business and provides its services to the general public
• The worker has his or her own business entity and a separate tax identification number
• The worker advertises in the electronic and/or print media
• The worker uses his own business cards, stationery and letterhead
• The worker submits invoices
• The worker carries required insurance policies
• The worker has his or her own place of business and invests in facilities, equipment, and supplies
• The worker pays his or her own expenses
• The worker assumes risk for profit or loss
• The worker sets their own schedule
• The worker sets or negotiates his or her own pay rate
• The worker offers services to other businesses (competitive or non-competitive)
• The worker can refuse work offers
• The worker can delegate the duties to be performed.

The above factors are not weighed equally. There are some industry specific issues to consider as well. An experienced employment lawyer can discuss the nuances and factors with you in greater detail and their application to your business. Feel free to contact our office for a confidential consultation.