Misclassification of employees as independent contractors is the way in which the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

and other countries classify the problem of

false self-employment False self-employment is a situation in which a person registered as self-employed, a freelancer, or a temp is de facto an employee carrying out a professional activity under the authority and subordination of another company. Such false self-empl ...

. In the U.S., it can occur with respect to tax treatment or the

Fair Labor Standards Act The Fair Labor Standards Act of 1938 (FLSA) is a United States labor law that creates the right to a minimum wage, and " time-and-a-half" overtime pay when people work over forty hours a week. It also prohibits employment of minors in "oppre ...

. The U.S.

Government Accountability Office The United States Government Accountability Office (GAO) is an independent, nonpartisan government agency within the legislative branch that provides auditing, evaluative, and investigative services for the United States Congress. It is the s ...

(GAO) reports that the IRS claims to lose millions of dollars in uncollected payroll,

social security Welfare spending is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifically to social insurance ...

, Medicare and unemployment insurance taxes because of misclassification of independent contractors by taxpayers.

Taxation

Employers must report the incomes of employees and independent contractors using the IRS forms W-2 and 1099, respectively. Employers pay various

tax A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

es (i.e.

Social Security Welfare spending is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifically to social insurance ...

and Medicare taxes, unemployment taxes, etc.) on the wages of a worker that is classified as an employee. These taxes are generally not paid by the employer on the compensation of a worker classified as an independent contractor. Instead, the contractor is responsible for their employer's share of the taxes when paying self-employment taxes at the end of the year. Classification affects whether a worker can receive unemployment benefits. In many states, independent contractors are not eligible for unemployment benefits because nothing has been paid into the unemployment insurance fund on their behalf. Employers who have no employees are not required to make payments to the unemployment insurance fund (since there is no one to claim benefits).

Reclassification

IRS reclassification as an employee occurs where persons claimed as (or claiming to be)

independent contractors Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any other ...

are recategorized by the

Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the Federal government of the United States, United States federal government, which is responsible for collecting Taxation in the United States, U.S. federal taxes and administerin ...

(IRS), or by state tax authorities, as W-2

employee Employment is a relationship between two party (law), parties Regulation, regulating the provision of paid Labour (human activity), labour services. Usually based on a employment contract, contract, one party, the employer, which might be a cor ...

s. The reclassification can result in the imposition of substantial fines, penalties and back-taxes for which the

employer Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any ot ...

is generally liable.

Employee vs. independent contractor

IRS regulations state that a worker is an employee if the employer can control what is to be done and how it is to be done. This was codified in revenue ruling 87–41, and is generally called "the twenty factor test". By contrast, if the worker controls the means and method of achieving the required results, leaving the employer with the right only to define the desired result, they are correctly classified as an independent contractor. Employees and independent contractors have very different benefits. Employees are entitled to the protection of wage and hour laws and are protected from discrimination and retaliation by employers. Employees may be legally entitled to family medical leave and benefits such as medical insurance and pension plans. Employees are entitled to bargain collectively with their employers. Employees are entitled to workers' compensation for job-related injuries and employers must pay into social security, Medicare, and unemployment insurance for their employees. No benefits or employer tax payments are available to contractors, who must pay for their own benefits and unemployment taxes. In the United States, a worker is by default recognized as an employee unless otherwise stated and specific criteria are met. It is not enough to only classify a worker as an "

independent contractor Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any oth ...

" in their contract, they also need to actually be treated as an independent contracto
(source)
Service sector employees are more likely than others to be misclassified as independent contractors. Commonly misclassified positions include delivery and taxi drivers, nurses and home health aides, housekeepers and adult entertainment workers. IRS Form SS-8 can be filed with the IRS to request that the agency determine the classification of a worker. In Australia in the 1950s, certain coal mining operations attempted to dodge mandatory pension payments for mineworkers, through contracting and sub-contracting which "made it difficult to classify the employees of contractors and sub-contractors".

Fair Labor Standards Act

In July 2015, the

U.S. Department of Labor The United States Department of Labor (DOL) is one of the executive departments of the U.S. federal government. It is responsible for the administration of federal laws governing occupational safety and health, wage and hour standards, unem ...

issued new guidelines on worker classification. "A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of "employ" under the Act, most workers are employees under the

Examples of disputes

Several

Uber Uber Technologies, Inc. is an American multinational transportation company that provides Ridesharing company, ride-hailing services, courier services, food delivery, and freight transport. It is headquartered in San Francisco, California, a ...

drivers have claimed to be employees, despite their classification as independent contractors. Some of the drivers sued after California passed a law aimed at requiring gig economy companies to classify workers as employees that took effect January 1, 2020. Likewise, many more workers in the gig economy are making similar claims. This goes for, for example,

Amazon Amazon most often refers to: * Amazon River, in South America * Amazon rainforest, a rainforest covering most of the Amazon basin * Amazon (company), an American multinational technology company * Amazons, a tribe of female warriors in Greek myth ...

's "last mile" delivery drivers and

FedEx FedEx Corporation, originally known as Federal Express Corporation, is an American Multinational corporation, multinational Conglomerate (company), conglomerate holding company specializing in Package delivery, transportation, e-commerce, and ...

's ground delivery drivers.https://uidl.naswa.org/ds2/stream/?#/documents/64/page/2

References

External links and resources

"IRS Offers Tips on How to Correct Reporting of Misclassified Employees", ''irs.gov'', March 27, 2006
* ttp://newstandardnews.net/content/index.cfm/items/3428 "FedEx Drivers Fight for ‘Employee’ Status, Rights", Megan Tady, ''The NewStandard'', July 18, 2006br>"Sebelius Announces Campaign to Ensure Fairness for Kansas Workers and Businesses", ''infozine.com'', July 11, 2006
*[https://www.nytimes.com/2014/08/17/technology/in-the-sharing-economy-workers-find-both-freedom-and-uncertainty.html? "In the Sharing Economy, Workers Find Both Freedom and Uncertainty", Natasha Singer, ''New York Magazine'', August 16, 2014]
"I was 1099’d: Employer Liability for Independent Contractors in the Service Sector", Melinda Pilling, ''Rukin, Hyland, Doria & Tindall'', October 8
https://scholar.google.com/scholar_case?case=12156401043773771981&q=abc+test+independent+contractor&hl=en&as_sdt=2006 {{DEFAULTSORT:Misclassification Of Employees As Independent Contractors United States labor law Tax avoidance Taxation in the United States