Misclassifying Employees as Independent Contractors Can Be Costly
Date Published: 2010-03-24
Author: Christina Harris Schwinn
Who is an independent contractor? An independent contractor for under Florida’s Workers’ Compensation Law is someone who meets at least 4 of the following criteria (see FS 440.02):
(I) The independent contractor maintains a separate business with his or her own work facility, truck, equipment, materials, or similar accommodations;
(II) The independent contractor holds or has applied for a federal employer identification number, unless the independent contractor is a sole proprietor who is not required to obtain a federal employer identification number under state or federal regulations;
(III) The independent contractor receives compensation for services rendered or work performed and such compensation is paid to a business rather than to an individual;
(IV) The independent contractor holds one or more bank accounts in the name of the business entity for purposes of paying business expenses or other expenses related to services rendered or work performed for compensation;
(V) The independent contractor performs work or is able to perform work for any entity in addition to or besides the employer at his or her own election without the necessity of completing an employment application or process; or
(VI) The independent contractor receives compensation for work or services rendered on a competitive-bid basis or completion of a task or a set of tasks as defined by a contractual agreement, unless such contractual agreement expressly states that an employment relationship exists.
If 4 of the 7 criteria above do not exist, an individual may still be presumed to be an independent contractor and not an employee based on full consideration of the nature of the individual situation with regard to satisfying any of the following conditions:
(I) The independent contractor performs or agrees to perform specific services or work for a specific amount of money and controls the means of performing the services or work.
(II) The independent contractor incurs the principal expenses related to the service or work that he or she performs or agrees to perform.
(III) The independent contractor is responsible for the satisfactory completion of the work or services that he or she performs or agrees to perform.
(IV) The independent contractor receives compensation for work or services performed for a commission or on a per-job basis and not on any other basis.
(V) The independent contractor may realize a profit or suffer a loss in connection with performing work or services.
(VI) The independent contractor has continuing or recurring business liabilities or obligations.
(VII) The success or failure of the independent contractor’s business depends on the relationship of business receipts to expenditures.
What are the consequences of classifying an individual as an independent contractor who is actually an employee? Pursuant to FS 440.107(7)(d) which provides as follows:
In addition to any penalty, stop-work order, or injunction, the department shall assess against any employer who has failed to secure the payment of compensation as required by this chapter a penalty equal to 1.5 times the amount the employer would have paid in premium when applying approved manual rates to the employer’s payroll during periods for which it failed to secure the payment of workers’ compensation required by this chapter within the preceding 3-year period or $1,000, whichever is greater.
And pursuant to FS 440.107(7)(f) which provides as follows:
In addition to any other penalties provided for in this chapter, the department may assess against the employer a penalty of $5,000 for each employee of that employer who the employer represents to the department or carrier as an independent contractor but who is determined by the department not to be an independent contractor as defined in s. 440.02.
For the purposes of illustration, let’s assume that a company has misclassified 5 employees and that such misclassification has been on going for a period of 3 years. Further, let’s assume that the workers’ compensation premium which would have been paid during the preceding 3 years equated to $15,000. Based on these facts the company could be liable for 1.5 times the original premium ($7,500), plus the original premium ($15,000), and a $5,000 penalty for each misclassified worker (5 x $5,000 = $25,000) which brings the grand total to $47,500 which is more than three times greater than the original premium.
Misclassifying employees can be intentional or unintentional. Typically, unintentional misclassifications occur when the parties to the agreement fail to understand that there is more to being an independent contractor than agreement which labels the individual as independent contractor. The substance of the relationship is what counts. Remember the old cliché “a rose is a rose by any other name”? The same is true in the employment context. An employee is an employee regardless of whether the employee signs a contract pursuant to which
an employee is labeled an independent contractor.
What is the attraction to classifying an employee as independent contractor? Perceived savings is typically the reason as the company does not have to pay workers’ compensation premium on payments made to an independent contractor, nor does the company have to pay federal and state unemployment taxes, social security or Medicare taxes.
This article focused on the consequences of misclassifying workers under Florida’s Workers’ Compensation Law. You should note that there are other tax penalties which may be imposed against a company that misclassifies employees as independent contractors under federal law and Florida’s unemployment compensation statute.
A note to the reader: This article is intended to provide general information and is not intended to be a substitute for competent legal advice. This article has been reprinted with the permission of Lee Building Industry Association, www.bia.net. Questions regarding the content of this column or past columns may be e-mailed to Christina Harris Schwinn at christinaschwinn@paveselaw.com. To view past columns written by Ms. Schwinn please visit the firm’s website at www.paveselaw.com. Ms. Schwinn is an experienced employment lawyer and a partner with the Pavese Law Firm, 1833 Hendry Street, Fort Myers, FL 33901; Telephone: (239) 336-6228; Telecopier: (239) 332-2243.