Misclassifying these employees can result in liabilities for years of unpaid tax withholdings. FedEx settled a case for $228 million in 2015 for mislabeling more than 2,000 FedEx Ground and FedEx Home Delivery drivers as contract workers. According to Reuters, recent court documents reveal Uber would have faced an estimated $730 million in expense reimbursements had drivers been classified as employees rather than contractors.
Many companies misclassify unintentionally because they fail to structure and document the independent contractor relationship in a manner that complies with federal laws. Stacy Reynolds, a vice president of operations at Adecco, says companies should consult tax professionals to ensure they correctly classify workers as the government regulations have many “gray areas.” “Many companies are letting HR make determinations. While they are well-intentioned, that can be a problem because the law is very nuanced,” says Reynolds.
A 2015 white paper on independent contractor misclassification by Pepper Hamilton law firm in Berwyn, Penn., details three ways by which companies can reduce their risk of misclassification. They include: restructuring and re-documentation to ensure workers pass the test for independent contractors, voluntarily reclassification (as an employee), and the redistribution of independent contractors by a workforce management or staffing company.
Reynolds recommends that companies have a process for classification of new hires and regularly re-evaluate their roles to ensure classification hasn’t changed. She says companies should establish an enterprise-wide 1099 policy and complete the 20-point IRS checklist on each new hire. All contractors should also sign documentation stating that they are not entitled to, and will not seek, unemployment benefits.
The IRS uses Form SS-8 to determine if a worker is an employee or an independent contractor. Most of the criteria involves “behavioral control” which identifies how workers receive assignments, methods in which they are performed, the worker’s daily routine, and where they are performed.
Noah Lang, cofounder and CEO and Stride Health says in a post at Linkedin that the growing freelancer economy will likely create more challenges around worker classification. He says there’s a new “labor class” that sits between “the now outdated 1099 definition and the restrictive W2.” Lang supports a new breed of “on-demand contractor” classification that allows companies to incentivize contractors without forcing them into employee status. “Although Uber and the other freelancer platforms have been delivering work and income to freelancers for years on terms most of their workers like, Washington hasn’t yet updated the tax and employment rules to accommodate their reality,” says Lang.