MISCLASSIFYING A WORKER AS AN INDEPENDENT CONTRACTOR WHEN SHE OR HE IS REALLY AN EMPLOYEE CAN BE COSTLY
By David Oliver, Ryan Lione and Laura Fowler
There are many areas in which Texas business owners can rejoice in their freedom to define their own destiny; misclassifying a worker as an independent contractor when they should be characterized as an employee is not one! Do not make the mistake of not understanding this area of employment law if you intend to associate your business with any human beings who will be compensated to perform tasks.
The following criteria must be met to characterize someone as an independent contractor:
- The contractor will be allowed to come and go as she or he pleases to complete tasks. In other words, the focus of the agreement is on completing a project, not on hours worked or a schedule.
- The freelancer will be largely autonomous, using her or his own equipment, systems of information, conferring with others of her or his choosing, or assigning others on a team of her or his choosing to assist in completing tasks.
- The worker should own her or his own business with an EIN, perform contracts with other business entities, and perhaps employ others. The person should not be working full time for your business.
- The person should not be someone who has recently been a W-2 employee for a business entity you own or a related enterprise.
The misclassification of employees as independent contractors puts the employer at serious legal risk under the law.
If misclassified and the worker is injured in the scope and course of doing what the business owner thought were independent contractor duties, virtually all defenses the business owner would have had vanish. In other words, the business owner becomes the literal insurer of that worker’s injuries. At the same time, none of the benefits of the Texas workers compensation statute limits on the business owner’s liability are available. The most likely way this arises is when a worker driving her or his own automobile in the scope and course of the business or the agreement between the owner and the worker has an accident and injuries herself or himself and/or others.
If an independent contractor succeeds in proving that she or he really should have been paid as an employee, the business owner typically will have no proof of the number of hours worked. Many categories of workers will be owed, at the very least, minimum wage plus time and a half for overtime.
Because the business owner has no records, the presumption favors the worker who may invent a fanciful narrative which the owner is then largely defenseless to rebut. The penalties and back wages owed to a worker who succeeds are enormous.
The penalties the IRS may impose upon the business owner for failure to withhold and remit payment to the IRS are substantial. The penalties apply to all payments owed which the business owner failed to withhold and remit timely to IRS on the worker’s behalf. Texas Workforce Commission Unemployment Fund can also inflict substantial penalties and interest upon those who do not pay because workers are misclassified as independent contractors.
Unless the business owner had the foresight to declare the worker and his or her activities on the business owner’s liability insurance policies, any damage or injury caused by the worker is uninsured. Driving around in the car is the biggest source of exposure. Business owners should have a discussion with their local business insurance agent about this.
Not fully understanding the difference in classification between an employee and an independent contractor can lead to costly legal battles. Consulting an experienced attorney before you write up any agreement with a worker is recommended to ensure you can avoid such situations.
The preceding is part of a series of articles being offered in the coming weeks by The Fowler Law Firm called Employment Law Summer School. These articles are designed to help you avoid costly legal mistakes. If you would like to attend Employment Law Summer School, email us at email@example.com for a list of conference sites, dates and times.
About your authors:
David Oliver serves as The Fowler Law Firm PC Managing Attorney, Georgetown, counsels daily with many private employers and represents them in trial.
Ryan Lione is a Senior Attorney at The Fowler Law Firm PC, having previously served as legal counsel to many employers including most recently as in house legal counsel to a large mental health care facility.
Laura Fowler is the Managing Shareholder of The Fowler Law Firm PC. She is a regular speaker on a variety of business related topics. Email her at firstname.lastname@example.org to receive updates on dates, topics and sponsors of upcoming discussions at various locations around Central Texas and Austin.
About The Fowler Law Firm PC: Attorneys with The Fowler Law Firm PC proudly donate their talents and resources to many area charities and teach courses in Continuing Education. Click HERE for more information. Follow our charitable adventures on our Facebook or LinkedIn pages. Click HERE for a printer-friendly version of this Electronic Alert.
Receipt of this Electronic Alert or printer-friendly version does not establish or constitute an attorney-client relationship. This information is not intended as a substitute for careful review by legal counsel of your own choosing. As with any legal issue, please consult your attorney with questions.