In today’s economy, employers are trying to find ways to save money while either retaining their existing employees or increasing their workforce.  One technique that has been on the rise for employers is classifying individuals as independent contractors, rather than as employees.  By doing this, employers theoretically save money by not having to provide the same benefits they otherwise have to provide to employees, such as health insurance, workers' compensation insurance, vacation time and overtime pay.  By classifying an individual as an independent contractor, the employer also does not have to pay any Social Security taxes with respect to that individual.

What determines whether an individual should be considered an employee or an independent contractor?  Although there is no bright-line rule, courts will look at whether the employer controls the means and manner of the individual’s performance, the level of supervision provided, whether the employer or individual provides the equipment used for the job, where the work is performed, whether the work is limited to a particular project and whether the work is an integral part of the business of the employer. Courts also will look at the percentage of income derived by the individual from the employer as compared to any other income the individual receives for similar work.

In many instances an individual will not understand when they are being classified as an independent contractor, and at the end of the relationship with the employer they will go to the Department of Labor to file for unemployment benefits.  However, independent contractors are not eligible for unemployment benefits.  If the Department of Labor believes the individual should have been classified as an employee, and not an independent contractor, this can result in an audit of not only that individual’s employment status, but of every individual working for that employer. 

During the audit, the Department of Labor has the right to review employment records for previous years for all individuals who worked for the employer, as well as those of individuals currently working, and if they find irregularities, they will require the employer to make restitution.  Unfortunately, in this situation, what may have started with an issue involving one individual has the ability to cause far more significant harm for the employer.

As with most legal matters, it is always wise to seek guidance prior to making a decision that can have far-reaching consequences.

Michael Weinstein is an attorney with MBW Law, LLC in Johns Creek. He specializes in labor and employment, corporate transactions, landlord/tenant and litigation. Contact Mike at 404-451-4730 or mike.weinstein@mbwlaw.net.

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