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All You Need to Know about Employee Misclassification

Are They Contractors or Employees?

Independent contractors and subcontractors are a major part of the construction industry. They are the lifeblood of many companies because they allow you to function with the workforce you need, tailored for every specific job. Because they cover their own licensing, tools and insurance, they cut down on overhead and allow you to function smoothly. It is important, however, to make sure that your independent contractors are not actually employees who are misclassified. Here’s what you need to know about avoiding employee misclassification in the construction industry.

Employee Misclassification

Employee misclassification is a major concern these days. It is all too common, and as a result the IRS is beginning to come down hard on those who engage in this practice. Most misclassification issues are simple errors on the part of employers who don’t understand what constitutes an employee versus an independent contractor. Nonetheless, the penalties can still be harsh and can result in serious liability problems to the tune of at least thousands of dollars in tax payments.


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Determining Self-Employment

A true independent contractor is self-employed. They control how and where they do their work, and the scope of the work. If you control the worker’s duties and how they are performed, if you determine how they are paid and who supplies tools and equipment, and if the worker performs a key role in your business on an ongoing basis, they are likely an employee and not an independent contractor.

Incorporated Workers

One of the best ways to avoid misclassification problems is to make sure you’re hiring workers who have already incorporated their own business. This provides a solid paper trail that you’re working with another business and not your own employees. When you work with a corporation, you pay the company, who then pays the worker. You are shielded from allegations that you have a relationship with the worker directly.

If you are audited by the IRS, you can use the paperwork to back up your claims that you are working with true contractors. The proof will be there that someone else is paying taxes, benefits and the like, and controlling the scope of work of the employee.

Employee Leasing

Another option is to hire workers from an employee leasing company. Such employees are temp workers, casual or contingent workers, or contract employees. The term and scope of their employment is set with the company through which you lease them. They, in turn, are paid and get their benefits from that company. They are, in essence, doing work for you while employed by someone else.

The danger of using this kind of worker is that if you supervise them and define the nature and scope of work, you can be seen as a joint employer, meaning they are still misclassified. It is essential when using independent contractors that you do not exercise control over them or their duties.

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The Problems of Employee Misclassification

In our last post, we talked about the increasing prevalence of employee misclassification in the construction industry. The reason this is so problematic in construction especially is that there are often independent contractors working on different construction jobs, so classifying workers in this way doesn’t appear to be incorrect. The reality of it, though, is that if a worker is doing all of the same tasks as an employee, and is following the regulations imposed upon employees, it’s likely a misclassification to call that worker an independent contractor. Read more

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Employee or Independent Contractor? A Look at Misclassification

Last time, we talked about employee misclassification, and how detrimental it is to both the economy and the industries within which it’s happening. Not only does misclassifying a worker as an employee or independent contractor ultimately exploit the worker from receiving the benefits to which he or she is entitled, it causes a financial drain on the entire economic system. Read more

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Worker Misclassification

The term “desperate times call for desperate measures” wasn’t invented from nothing, and it unfortunately rings true in times of economic recession. During the most recent recession, the construction industry slowed down quite drastically, as many residential and commercial jobs were put on the backburner if they weren’t absolute necessities. Due to the lack of income being brought in, some construction companies started to hire workers and falsely classified them as “independent contractors” instead of “employees” so that they didn’t have to pay the correct amount for insurance, taxes, wages, and overtime. Although cutting corners may seem to be an option when times are tough, worker misclassification is never the answer.

Many employers are upholding their professional integrity and following the rules, even though they know that following these less-than-legal practices could save them tons of money. These employers believe that it’s a matter of principle, and that they wouldn’t want to exploit their employees who are working hard by denying them the protection and compensation to which they’re entitled for the jobs they’re doing.

Across the nation, state legislators are narrowing their scope on worker classifications in order to identify and penalize employers who are inaccurately classifying workers and failing to declare income. There’s been a steady increase since 2010, when only 23 states had laws on worker misclassification, to a total of 30 states with misclassification laws in place now.

Beside the fact that implementing these laws protected workers who were being mistreated, this has also been an opportunity for states to collect substantial revenue. Through the institution of these laws, employers who misclassified employees are made to pay restitution for their manipulation of the system.

To give you some figures to put worker misclassification into perspective, according to a report from the Treasury Inspector General for Tax Administration, for every worker who earns a salary of $43,007, the employer will save an average of $3,710 by classifying the worker as an independent contractor. Worker misclassification is a growing epidemic in all industries, but especially in construction. It was discovered after a 12-month audit in Connecticut that 3,487 workers had been misclassified. This meant that workers earned $68.2 million “off the books,” which means that $1.3 million in payroll taxes went unpaid.

We’ll continue our discussion of worker misclassification in our next post—check back with us soon!