For employers, the use of independent contractors to assist in business operations is an important option.

Contractors typically provide flexibility and cost savings as they don’t receive overtime pay or employee benefits like health insurance and retirement plans.

Generally, businesses do not withhold taxes from compensation paid to contractors. The explosion of the gig economy and the growing practice of “freelancing” has accelerated the number of individuals who are classified by businesses as independent contractors, rather than employees. With this trend, federal employment agencies are increasingly challenging employers’ classification of workers as contractors. The potential liability to employers found to have misclassified workers as independent can be substantial.

Determining whether a particular individual is properly classified is fact-intensive and depends on circumstances. When deciding whether to classify a worker as an employee or independent contractor, an employer should consider the following factors:

• Nature and extent of control by the employer.
• Permanency and duration of the relationship.
• Contractor’s investment in their own facilities, equipment, material, tools.
• Amount of skill, judgment and discretion exercised by the contractor.
• Contractor’s opportunities for making profit or incurring loss from services provided.
• Extent the contractor’s services are integrated into the employer’s regular operations.

Federal agencies have been actively scrutinizing employers’ classifications. When an agency finds an individual should have been classified as an employee, results are significant. Examples include:

• Internal Revenue Service – employer failed to make mandatory tax withholdings.
• Department of Labor, Wage & Hour Division – individuals owed overtime for a three-year period.
• National Labor Relations Board – individuals classified as “contractors” were employees entitled to form a union.
• Department of Labor, Employee Benefits Security Administration – individuals classified as “contractors” improperly excluded from health insurance coverage and inclusion in 401(k) plan.

In addition to federal agencies challenging individuals’ classification as independent contractors, state employment, benefit and tax agencies are getting in on the act, and individual workers are suing employers for unpaid overtime and missed benefits.

Businesses should expect this trend to grow. Now is the time for employers to analyze whether their classifications of some workers as independent contractors rather than employees can withstand challenges by federal agencies, state agencies, or individual plaintiffs.

This article appeared in the August 18, 2022, issue of The Journal Record. It is reproduced with permission from the publisher. © The Journal Record Publishing Co.