Employees vs. Independent Contractors: The Pitfalls of Misclassification
Hannah Rich of Employers Council • July 18, 2023
As an employer, it is vital to understand the differences between employees and independent contractors.
An employee is an individual with whom a business has established an employment relationship. An independent contractor is an individual or business with whom a business has established a contractual relationship. In a contractual relationship, each party’s obligations to the other are agreed upon in advance and can change only if renegotiated by both parties. An employer, on the other hand, has broad discretion over the work assignments, duties, and schedule of an employee and can make significant changes at any time as business needs change.
Understanding the differences can help employers avoid the negative consequences of misclassification. And following a recent National Labor Relations Board (NLRB) decision, employers should keep in mind that they will face a stricter test when trying to classify workers as independent contractors. This Employers Council article explains more about the decision.
Pitfalls for Workers
Due to the control an employer has over its workforce, laws exist to protect employees from exploitative practices. The Fair Labor Standards Act (FLSA) defines an employee simply as “an individual employed by an employer.” While this may seem a circular definition on the surface, the implications run deep. Nearly every federal and state regulation addressing employee protection relies upon the FLSA definition of employee. Workers who do not fit the FLSA definition are not covered by these codified protections and benefits.
The following are some disadvantages of a worker being classified as an independent contractor:
- Loss of employee protections: Workers’ compensation, leave entitlements under FMLA, and protection from discrimination in employment are just a few examples of protections that employees lose out on by being misclassified as independent contractors.
- No benefits programs: Employee benefits programs are not available to independent contractors. As a separate business entity, they are expected to pay for their own work-related expenses, provide their own health insurance, and make their own plans for retirement savings. Employer contributions and contribution matches are also benefits reserved for employees.
- Responsible for payroll taxes: Independent contractors are responsible for 100% of Social Security and Medicare taxes, as well as calculation and remittance of income taxes throughout the year. Employees, on the other hand, pay 50% of Social Security and Medicare taxes, with the other half paid by their employer. Employees’ taxes are also calculated and deducted from each paycheck throughout the year, then remitted on their behalf by the employer.
Pitfalls for Employers
Workers are not the only ones at risk in the case of employee misclassification. Employers that are found to have misclassified an employee as an independent contractor may face financial liability, including the following:
- Back payments: If an alleged contractor is found to be an employee, the employer will be retroactively responsible for their rightful portions of several common costs of employment. The statute of limitations for financial liability may vary, but in general, such payments are calculated in arrears for immediate payment. Companies can also be charged late fees and interest on past-due amounts.
- Payment will be owed to the IRS for payroll taxes.
- Payments owed to the state may include workers’ compensation and unemployment insurance premiums.
- Payments owed to vendors may include benefits premiums, retirement plan contributions, and fringe benefits.
- Payments owed to the employee may include back wages for up to three years, if hours and pay do not meet FLSA minimum wage and overtime standards.
- Time and expense of legal proceedings: Most often, a misclassification decision comes at the end of a lawsuit or arbitration, when the legal system weighs all evidence and determines whether a worker was appropriately classified as an independent contractor. When a decision is made in the worker’s favor, they may be awarded additional damages and legal expenses to be paid by the employer.
Avoiding Misclassification
One of the most difficult elements of employee vs. independent contractor classification is that the employment relationship is based on economic reality. That means that there is no cut-and-dried definition of an independent contractor, and each worker’s situation must be examined independently. To assist with this examination, Employers Council has several resources that can help.
It may help to remember that the employment relationship is the foundation upon which all employee protections are built. If a situation leaves you feeling that any form of employee protection may or should apply to an independent contractor, it may be a sign that an employment relationship already exists. In these cases, dig further and ask questions to determine whether it is time to reclassify a worker. Similarly, if a suggestion is made to hire an independent contractor to avoid employee protections or their associated financial burdens, carefully examine whether the nature of the role meets the standards of classification tests.
Often, misclassification is an error, not a conscious decision. If you have questions about the appropriate classification of a new or existing worker, reach out to Employers Council at info@employerscouncil.org for assistance.
Federal discrimination laws protect individuals from discrimination in the workplace on the basis of race, color, religion, sex (including pregnancy, sexual orientation, or gender identity), national origin, age (40 and older), disability, or genetic information. Obesity, however, is noticeably absent from protection under federal law as well as most state laws. As a result, sizeism, or weight-based discrimination, remains a prevalent issue, with more than 40% of U.S. adults experiencing weight stigma at some point in their lives, according to the American Psychological Association (APA). According to the Centers for Disease Control and Prevention (CDC), 42% of Americans are obese , making this a significant and widespread concern. Sizeism, like other forms of bias and discrimination, not only causes suffering and psychological distress but also increases the risk of mental health problems, such as substance abuse and the risk of suicide, according to the APA. While federal laws have yet to address weight-based discrimination, some states and municipalities have begun recognizing the need for change. Likewise, some federal and state courts have interpreted disability laws to provide protection. Currently, Michigan is the only state to make weight-based discrimination illegal. Four states, Massachusetts, New York, New Jersey, and Vermont, have recently introduced bills dealing with weight-based discrimination. New York City, Washington, D.C., and San Francisco are among a handful of U.S. cities with local ordinances that prohibit discrimination based on weight or appearance. At this time, Arizona, Colorado, New Mexico, Utah, and Wyoming have not taken legislative action to address obesity as a protected class. The majority of federal courts hold that obesity is not a physical impairment under the Americans with Disabilities Act (ADA) unless it is the symptom of an actual or perceived underlying physiological disorder or condition, such as diabetes. These courts have relied on interpretive guidance from the Equal Employment Opportunity Commission (EEOC) on the definition of “impairment” under the ADA. Recently, federal district courts in Texas, Louisiana, and Mississippi have determined that, even absent an underlying physiological disorder, obesity could be an actual or perceived disability under the ADA. Likewise, state courts in Washington, Montana, and New Jersey, have interpreted state statutes to include obesity as a disability. By taking proactive measures, employers can protect themselves from potential liability. Employers should refrain from employment decisions based on physical characteristics absent a legitimate job-related requirement. Employers in states where obesity may be treated as a disability should review their disability policies and include size, and make sure managers are trained on the policies. Additionally, employers should accurately state job descriptions to reflect the essential functions and demands of the job. These steps help contribute to a more equitable and supportive work environment for all employees. This is an area to watch as more legislatures and courts consider the issue of obesity as a protected class. If you have any questions about workplace discrimination, please contact the Employers Council Member Experience Team.
The statewide minimum wage for Colorado — currently $13.65 — will increase on January 1, 2024, in line with the cost of living (COLA) to an amount not yet determined. The state is not alone in its upcoming minimum wage hike. During the 2019 legislative session, Colorado passed House Bill 19-1210 , which allowed local governments to enact a minimum wage higher than that of the state. The Legislature did so because the cost of living can vary significantly from one community to another. The law enables local governments to address the minimum needs of the workers and businesses in their jurisdictions.
As a reminder, the Pregnant Workers Fairness Act (PWFA) , a new federal law, goes into effect on June 27, 2023. The PWFA applies to employees and applicants of employers with at least 15 employees. The Equal Employment Opportunity Commission (EEOC) is charged with enforcing this law, and regulatory guidance is pending. The PWFA requires employers to provide reasonable accommodations to employees and applicants affected by pregnancy, childbirth, or related conditions. Some examples include the following: Closer parking Additional break time to use the restroom, eat, and rest Modifications of food and drinking policies Appropriately sized uniforms or safety equipment Time off or flexible scheduling for prenatal or postnatal appointments The PWFA also has several prohibitions, including the following: Requiring an employee to take leave if another accommodation would work Retaliation for requesting accommodations or reporting unlawful discrimination Denying employment opportunities based on the need for accommodations Requiring employees to accept an accommodation without engaging in the Americans with Disabilities Act (ADA) interactive process Don’t confuse the PWFA with the Providing Urgent Maternal Protections for Nursing Mothers Act (PUMP Act). The PUMP Act requires employers to provide reasonable break time and private, non-bathroom space for nursing employees to pump for a nursing child’s first year of life. The following resources provide more information about protections for workers affected by pregnancy, childbirth, and related conditions: Employers Council - Accommodations for Conditions Related to Pregnancy or Childbirth EEOC - Legal Rights of Pregnant Workers under Federal Law EEOC - What You Should Know About the Pregnant Workers Fairness Act Employers Council - Find relevant laws for all 50 states in the CCH multi-state tool . If you would like more information the PWFA, please reach out to Employers Council to discuss membership options at sales@employerscouncil.org .
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Assisted living operators are often involved in Adult Protective Services investigations, but unless the facility has been the recipient of APS legal action, the facility may not find out what happened or what APS learned because APS investigations are often considered confidential.
Enjoy pictures from the recent tour of Assisted Living providers on the Western Slope
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Hi everyone, Today I had a conversation with Peter Myers and April from CDPHE in regards to fit testing of N95s and the Infection Prevention guidelines. In regards to the N95s April reported: CDPHE has created a N95 fit tool kit that might be able to be shared wit the counties so that they could possibly use it to fit test assisted living homes that don’t have the resources to fit test. San Juan county is fit testing assisted livings for free if you know anyone in San Juan county tell them to call the local health department April will contact the local health departments to see what they might need to provide fit testing and will get back with me in regards to what she finds out and if anything can be put into place. April and Peter will contact emergency preparedness and EMS contacts at CDPHE to see if they can help do fit tests Peter said he would let Cheryl and the survey team know that the smalls don’t have enough resources at this time to be compliant with fit tested N95s and that we are trying. Im hoping this means they will continue not to survey us on this as this would equal a deficiency that could hurt us greatly with insurance renewals. I will be asking Medicaid tomorrow for resources and $ to get this done as well Infection Prevention Guidance: Peter and April have agreed to create a checklist/form with requirements that assisted livings need to comply with. What they explained to me was quite simple… Things like who is responsible to keep the assisted living compliant with guidance and testing requirements, who is responsible to make sure all IP trainings have been completed with staff (hand washing, Donning/ Doffing, cleaning etc…), who is responsible to speak with the departments if there is an outbreak of COVID, etc…. Nothing that was mentioned made me feel as if we would have difficulties meeting this requirement. I did mention ONCE AGAIN that CALA and small assisted livings as a whole continue to feel as if we are being required to care for those that are infectious and they shouldn’t be cared for in assisted living in the first place……. They both noted the comment…. I will continue to keep you all in the loop as to any up dates. Keep your fingers crossed as tomorrow is the meeting with Medicaid. Thank you, Nicole Zamparelli-Schiavone RN – CALA President OWNER-Administrator A Wildflower Assisted Living & Care Home Inc Cellphone- 720-628-9092 Fax-1-866-799-0979 www.AWildflowerAssistedLiving.com
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Federal discrimination laws protect individuals from discrimination in the workplace on the basis of race, color, religion, sex (including pregnancy, sexual orientation, or gender identity), national origin, age (40 and older), disability, or genetic information. Obesity, however, is noticeably absent from protection under federal law as well as most state laws. As a result, sizeism, or weight-based discrimination, remains a prevalent issue, with more than 40% of U.S. adults experiencing weight stigma at some point in their lives, according to the American Psychological Association (APA). According to the Centers for Disease Control and Prevention (CDC), 42% of Americans are obese , making this a significant and widespread concern. Sizeism, like other forms of bias and discrimination, not only causes suffering and psychological distress but also increases the risk of mental health problems, such as substance abuse and the risk of suicide, according to the APA. While federal laws have yet to address weight-based discrimination, some states and municipalities have begun recognizing the need for change. Likewise, some federal and state courts have interpreted disability laws to provide protection. Currently, Michigan is the only state to make weight-based discrimination illegal. Four states, Massachusetts, New York, New Jersey, and Vermont, have recently introduced bills dealing with weight-based discrimination. New York City, Washington, D.C., and San Francisco are among a handful of U.S. cities with local ordinances that prohibit discrimination based on weight or appearance. At this time, Arizona, Colorado, New Mexico, Utah, and Wyoming have not taken legislative action to address obesity as a protected class. The majority of federal courts hold that obesity is not a physical impairment under the Americans with Disabilities Act (ADA) unless it is the symptom of an actual or perceived underlying physiological disorder or condition, such as diabetes. These courts have relied on interpretive guidance from the Equal Employment Opportunity Commission (EEOC) on the definition of “impairment” under the ADA. Recently, federal district courts in Texas, Louisiana, and Mississippi have determined that, even absent an underlying physiological disorder, obesity could be an actual or perceived disability under the ADA. Likewise, state courts in Washington, Montana, and New Jersey, have interpreted state statutes to include obesity as a disability. By taking proactive measures, employers can protect themselves from potential liability. Employers should refrain from employment decisions based on physical characteristics absent a legitimate job-related requirement. Employers in states where obesity may be treated as a disability should review their disability policies and include size, and make sure managers are trained on the policies. Additionally, employers should accurately state job descriptions to reflect the essential functions and demands of the job. These steps help contribute to a more equitable and supportive work environment for all employees. This is an area to watch as more legislatures and courts consider the issue of obesity as a protected class. If you have any questions about workplace discrimination, please contact the Employers Council Member Experience Team.
The statewide minimum wage for Colorado — currently $13.65 — will increase on January 1, 2024, in line with the cost of living (COLA) to an amount not yet determined. The state is not alone in its upcoming minimum wage hike. During the 2019 legislative session, Colorado passed House Bill 19-1210 , which allowed local governments to enact a minimum wage higher than that of the state. The Legislature did so because the cost of living can vary significantly from one community to another. The law enables local governments to address the minimum needs of the workers and businesses in their jurisdictions.