A worker was awarded damages by a U.S. district court against an employer who classified her to the IRS as an independent contractor rather than an employee.
Plaintiff Valerie Vanderbilt filed this case against Boat Bottom Express Limited Liability Company (“BBE”), a business in Ramrod Key, Florida, and Jeffrey Peer, owner of BBE, for unpaid overtime violations, fraudulent filing of a tax return, and breach of contract.
- 1 Employee finds out from a CPA that she is an employee, not an independent contractor.
- 2 Independent contractor vs. employee
- 3 Consequences of misclassifying a worker
- 4 What should an employer do if they have been misclassifying their employees?
- 5 What should a worker do if their employer has been misclassifying them?
Employee finds out from a CPA that she is an employee, not an independent contractor.
Regarding Plaintiff’s claim for fraudulent filing of tax return pursuant to 26 U.S.C. § 7434 against both Defendants, Ms. Vanderbilt testified that, after consulting a personal acquaintance who is a “CPA,” she told Mr. Peer twice in the same week that she should be classified as an employee and not an independent contractor.
She testified that in 2019, she nevertheless received through U.S. Mail an IRS Form 1099-MISC for the 2018 fiscal year.
Plaintiff argues that this evidences Defendants unlawfully giving false information to the IRS indicating that she was an independent contractor, when in fact she was an employee.
The Court finds that BBE furnished the document at issue to the IRS, and as such, BBE is liable to Plaintiff for statutory damages pursuant to 26 U.S.C. § 7434.
Independent contractor vs. employee
According to the IRS, “worker classification is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Businesses normally do not have to withhold or pay any taxes on payments to independent contractors. The earnings of a person working as an independent contractor are subject to self-employment tax.”
“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done.”
There are three categories of rules for determining whether a worker is an independent contractor or an employee.
Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:
- Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
- Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
- Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
- Training a worker on how to do the job — or periodic or on-going training about procedures and methods — is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.
Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job? Consider:
- Significant investment in the equipment the worker uses in working for someone else.
- Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
- Opportunity for profit or loss is often an indicator of an independent contractor.
- Services available to the market. Independent contractors are generally free to seek out business opportunities.
- Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.
Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:
- Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
- Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
- The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
- Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.
Consequences of misclassifying a worker
Independent contractors have virtually no protection such as a right to minimum wage, overtime pay, sick pay, and rest breaks. They also do not qualify for unemployment benefits if they are laid off or terminated.
Employers can save a significant amount of money by classifying a worker as an independent contractor at the expense of the employee and the IRS.
Misclassifying a worker as an independent contractor will result in liability for employment taxes, unless the employer can show a reasonable basis for not treating a worker as an employee.
The IRS is focusing on worker classification issues through several programs including:
- The Classification Settlement Program which allows employers under audit to resolve classification issues earlier in the administrative process.
- National research program employment tax audits which gathers data on worker classification and other information. Employers are randomly selected.
- Correspondence, office, and field audits
- Department of Labor and IRS coordinated investigations
- State reverse file match initiative program
What should an employer do if they have been misclassifying their employees?
For employers who are not already under investigation for worker misclassification, the IRS provides a Voluntary Classification Settlement Program (VCSP) which offers certain eligible businesses the option to reclassify their workers as employees with partial relief from federal employment taxes.
Employers who are not sure if their worker should be classified as an employee or an independent contractor can request that the IRS make the determination by filling out IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
What should a worker do if their employer has been misclassifying them?
First, try talking to your employer. Oftentimes, the employer may not be aware of the worker classification rules.
If that doesn’t work, fill out IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Filing a Form SS-8 requesting a “worker status” determination means you are asking the IRS to establish if the services you provide to the firm are those of an employee or an independent contractor.
If you’ve been terminated, you can file an unemployment insurance claim and explain that you’ve been misclassified as a contractor.