Through numerous conversations I have had with companies, it seems fairly clear to me that the misclassification of employees as independent contractors has reached an epidemic level. If I know it, you can rest assured that federal and state government officials know it too and will be clamping down on it.
Recent actions of both federal and state governments on the issue of independent contractors is a clear indication that businesses better understand misclassification and stop it.
New Jersey recently placed all businesses on notice regarding misclassification, going as far as to mandate the posting of a misclassification notice.
On October 13, 2022, the United States Department of Labor proposed a change in determining employee or independent contractor status that would reduce the risk of misclassification.
I have written on the topic of independent contractors and suggest you review it, as it covers the ABC and Common Law tests used to determine proper classification.
But what I have been hearing seems to be outside the realm of independent contractor status.
Hear are a few instances of probable misclassification:
-The hiring of an intern and making them an independent contractor
-The hiring of a “temporary employee” and making them an independent contractor (assuming the person is not working through a staffing agency, which would technically be their employer)
-Hiring someone for a defined “probationary” period and placing them in an independent contractor classification through that timeframe
-A business throwing a retirement party for their accounting manager and, one week later, bringing that person back as an independent contractor to work on a pressing project. (Note: this scenario would be based on an assumption that this retiree has not opened their own consulting business and/or would not pass one of the independent contractor tests).
Businesses need to keep in mind that even though someone may tell them they are an independent contractor, and may even have an LLC designation, the company still has an obligation to ensure this person passes the ABC or Common Law tests.
Businesses that want to roll the dice with their current practices should be mindful of the penalties.
In New Jersey, employers who “purposely” or “knowingly” misclassify employees may be subject to penalties for fraud that include fines starting at $5,000 for the first violation, $10,000 for the second violation, and $15,000 for each subsequent violation. The state could even close down their business.
The federal governmant and other states also will give out stiff penalties to those businesses that treat employees unfairly, while also depriving these jurisdictions of mandated payroll tax revenue.
Marzano Human Resources Consulting works with businesses to ensure they are in compliance employee classification regulations.