The “Independent” Contractor. Legal issues.
A friend of us told us once:
“If somebody fools you, is not a shame. It might be because you trusted that person, or you were trying to do a good deed. The shame is when you fool yourself!”
This statement applies when you are trying to disguise employees as “independent contractors”.
Don’t fool yourself. The penalties are too great. In addition to the taxes and related penalties and interest that you will have to pay, there are other liabilities involved.
The insurance company will bill you for all the Workers' Compensation insurance premiums that should have been paid. The insurance companies have their own auditors and, generally, audit the business once a year, depending on your type of business.
If a contractor tells you that he/she works alone and does not have employees, then you should get a statement from the contractor stating that:
"I certify that in the performance of work for which I am engaged by ____(you)_____, _____(I)_____ shall not employ any person in any manner so as to become subject to the workers' compensation laws. If I do not comply with this requirement, I will indemnify you for any expenses incurred by you."
Signed: ________________________ Date: ____________.
In addition, the Department of Labor (DOL) may fine you for not covering the employees. The fines may be onerous. If the DOL is successful in reclassifying your “independent contractors” as employees, then all labor laws apply and the overtime pay, minimum wage, notices, safety, and record keeping rules apply.
The U.S. Department of Labor is aggressively pursuing businesses that are not complying with the Federal labor laws and have taken the role as the “Quixotes” of the labor force.
The Internal Revenue Service (IRS) and the Franchise Tax Board (FTB) use the “control test” to determine if a person is independent or an employee. The DOL uses a more extensive “Economic Reality” test. This test uses the “what is really happening here?” approach. Your labor may be classified as independent by the IRS or FTB, but as employees by the DOL.
In our opinion, one of the reasons that the DOL is so aggressive, is that this is one way that the federal government has to influence the “illegal alien” problem. It is no secret that there is an overwhelming amount of illegal aliens in the United States. Since the illegal aliens can not be hired directly, the business transfers the responsibility of hiring illegal aliens to their “independent contractors”. Convert your legal employees into independent contractors, and it is their problem to obtain the employees needed to run your operations. This is one of the reasons that the DOL applies the “Economic Reality” test. By applying this test the DOL can apply an “alter ego” approach to the hiring of illegal aliens. The DOL can this way perforate the several layers of employee hiring and go to the top. Please read the accompanying article: What is a “no-match” letter?
To misclassify your employees is a time bomb. When the time bomb explodes on you, the consequences will be disastrous!
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