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Beware the Employee Misclassified as an Independent Contractor

It seems I have been talking a lot with people lately about misclassified employees, in other words, the risky practice of treating workers as “independent contractors” when they are in reality employees and not independently employed at all. How to classify a worker depends on the actual circumstances of the work relationship, not the labels you use.

Why is this important? Failing to treat true employees as employees can get the business in hot water. Here are a few examples of what a business may fail to do if it has misclassified an employee as an independent contractor, which can result in lawsuits by the employee, audits and fines from the state and federal governments, and other liability:

  1. Failure to pay minimum wage

  2. Failure to pay into unemployment insurance

  3. Failure to obtain workers compensation insurance

  4. Failure to withhold and pay federal income tax, Social Security payments, Medicare, unemployment taxes

  5. Failure to have in place lawful employer practices and policies

  6. Failure to have adequate employer practices liability insurance

  7. Failure to have adequate third-party liability insurance for harm the employee causes to another

In the industries I work with, there often exist creative work arrangements. All creative work arrangements are still subject to the question and analysis of: “employee or independent contractor?" Let’s use the horse industry as an example. There, people may trade labor for things of value, such as discounted horse board or riding lessons. This relationship may result in bartering income that must be reported appropriately at tax time. But this arrangement also is subject to the legal analysis of whether, on the specific facts of the situation, the person doing the labor is an employee and therefore entitled to all the rights and benefits of employment, such as minimum wage and overtime. As another example, there are myriad arrangements for unpaid internships or “working students.” Unpaid internships deserve their own attention because they must meet specific standards to be lawful and qualify to be an unpaid educational experience rather than a job that requires payment of minimum wage. Finally, there may be times when a friend gratuitously helps a business owner, such as with moving hay or otherwise helping out on the farm. If the business is for-profit, that friend is not a volunteer; they may be considered an employee as a matter of law. If something were to happen to the friend or if that friend were to injure someone else, that business could face employer liability or liability to the third party.

If you are a for-profit or non-profit business with varying kinds of work arrangements, it is never too soon to review your practices with your attorney and accountant to ensure that you are properly classifying your workers. Doing so will help you ensure that you are in compliance with the law and have adequate liability insurance in place to protect your business.

Note: Individual circumstances and state laws vary. This post is not intended and should not be relied on as legal advice for your particular circumstance. If you are in need of legal assistance, seek legal counsel. Contact Margrit with any questions,, 303-481-2866.

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