SHOUP: Emancipation is near for independent contractors

July 24, 2010

Steve ShoupDue to the probability of stepped-up enforcement of well-established employment law, Indiana employers who classify workers as independent contractors are soon going to have another concern other than the fragile state of the economy—namely, whether the workers are really independent contractors or actual employees.

We all have the legal, moral and ethical obligation to comply with the law, but the timing of the enforcement action during these perilous economic times could tip over the edge economically strapped employers who, in good faith, have misclassified employees as independent contractors.

Indiana’s Senate Enrolled Act 23 became effective July 1. The statute, focused on the beleaguered Indiana construction industry, requires the Indiana Department of Labor to develop guidelines for it to follow during its planned investigations of complaints of misclassification of employees as independent contractors.

The guidelines will establish who may file a complaint, propose penalties for misclassification, and determine how best to share information with other Indiana agencies.

When the guidelines will be developed and when the Indiana Department of Labor will begin conducting investigations following their development is unknown. A reasonable guess is 2011, based on anticipated action by the U.S. Department of Labor to “combat employee misclassification” in all industries with the $25 million earmarked for that purpose in the 2011 federal budget and the Internal Revenue Service’s announced plan to audit 6,000 employers over the next three years focusing on misclassification issues.

The U.S. Bureau of Labor Statistics has determined there are over 10 million workers nationwide classified as independent contractors. The U.S. Government Accountability Office has concluded that many of the 10 million are actually employees, not independent contractors, and that the misclassification by employers has resulted in billions of dollars of tax revenue being lost.

Why? Employers who classify workers as independent contractors avoid withholding income taxes, matching a worker’s contribution to Social Security and Medicare, make no contribution to an unemployment compensation fund, pay no Worker’s Compensation insurance premium, and provide no fringe benefits such as health insurance, pension contributions and paid leave. These savings can reduce payroll costs more than 30 percent.

There is no single “bright line” test used by state or federal agencies to determine whether a worker is an employee or an independent contractor.

Generally, one of two tests is used—either the “common law” test or the “20 factor” test developed by the Internal Revenue Service. Regardless of the test, the focus is on the degree of control exercised by an employer over a worker.

The more control exercised, the more likely the worker will be deemed to be an employee. If a worker is retained after filling out an employment application, is told how to perform the work and where and when to do it, there is a good chance the worker is an employee and not an independent contractor.

With Indiana gearing up to assess fines against construction industry employers who misclassify employees as independent contractors, and the United States government gearing up to “combat employee misclassification” in all industries, now is the time for Indiana employers to review their employment practices and make necessary changes to avoid getting hammered.•


Shoup is of counsel at the Indianapolis office of Atlanta-based Ogletree Deakins Nash Smoak & Stewart. Views expressed here are the writer’s.

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