Misclassification of employees as independent contractors is the way in which the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...

classifies the problem of

false self-employment False self-employment is a situation in which somebody registered as self-employed, a freelancer, or a temp is de facto an employee carrying out a professional activity under the authority and subordination of another company. Such false self-emp ...

. It can occur with respect to tax treatment or the Fair Labor Standards Act. The U.S.

Government Accountability Office The U.S. Government Accountability Office (GAO) is a legislative branch government agency that provides auditing, evaluative, and investigative services for the United States Congress. It is the supreme audit institution of the federal govern ...

(GAO) reports that the IRS claims to lose millions of dollars in uncollected payroll,

social security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...

, Medicare and unemployment insurance taxes because of misclassification of independent contractors by taxpayers.

Taxation

Employers must report the incomes of employees and independent contractors using the IRS forms W-2 and 1099, respectively. Employers pay various

tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...

es (i.e.

Social Security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...

and Medicare taxes, unemployment taxes, etc.) on the wages of a worker that is classified as an employee. These taxes are generally not paid by the employer on the compensation of a worker classified as an independent contractor. Instead, the contractor is responsible for their employer's share of the taxes when paying self-employment taxes at the end of the year. Classification affects whether a worker can receive unemployment benefits. In many states, independent contractors are not eligible for unemployment benefits because nothing has been paid into the unemployment insurance fund on their behalf. Employers who have no employees are not required to make payments to the unemployment insurance fund (since there is no one to claim benefits).

Reclassification

IRS reclassification as an employee occurs where persons claimed as (or claiming to be)

independent contractors Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any other ...

are recategorized by the

Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...

(IRS), or by state tax authorities, as W-2

employee Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any other ...

s. The reclassification can result in the imposition of substantial fines, penalties and back-taxes for which the

employer Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...

is generally liable.

Employee vs. independent contractor

IRS regulations state that a worker is an employee if the employer can control what is to be done and how it is to be done. This was codified in revenue ruling 87–41, and is generally called "the twenty factor test". By contrast, if the worker controls the means and method of achieving the required results, leaving the employer with the right only to define the desired result, they are correctly classified as an independent contractor. Employees and independent contractors have very different benefits. Employees are entitled to the protection of wage and hour laws and are protected from discrimination and retaliation by employers. Employees may be legally entitled to family medical leave and benefits such as medical insurance and pension plans. Employees are entitled to bargain collectively with their employers. Employees are entitled to workers' compensation for job-related injuries and employers must pay into social security, Medicare, and unemployment insurance for their employees. No benefits or employer tax payments are available to contractors, who must pay for their own benefits and unemployment taxes. In the United States, a worker is by default recognized as an employee unless otherwise stated and specific criteria are met. It is not enough to only classify a worker as an "

independent contractor Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...

" in their contract, they also need to actually be treated as an independent contracto
(source)
Service sector employees are more likely than others to be misclassified as independent contractors. Commonly misclassified positions include delivery and taxi drivers, nurses and home health aides, housekeepers and adult entertainment workers. IRS Form SS-8 can be filed with the IRS to request that the agency determine the classification of a worker.

Fair Labor Standards Act

In July 2015, the

U.S. Department of Labor The United States Department of Labor (DOL) is one of the United States federal executive departments, executive departments of the federal government of the United States, U.S. federal government. It is responsible for the administration of fede ...

issued new guidelines on worker classification. "A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of "employ" under the Act, most workers are employees under the Fair Labor Standards Act."

Examples of disputes

Several

Uber Uber Technologies, Inc. (Uber), based in San Francisco, provides mobility as a service, ride-hailing (allowing users to book a car and driver to transport them in a way similar to a taxi), food delivery (Uber Eats and Postmates), package ...

drivers have claimed to be employees, despite their classification as independent contractors. Some of the drivers sued after California passed law aimed at requiring gig economy companies to classify workers as employees that took effect January 1, 2020. Likewise, many more workers in the gig economy are making similar claims. This goes for, for example,

Amazon Amazon most often refers to: * Amazons, a tribe of female warriors in Greek mythology * Amazon rainforest, a rainforest covering most of the Amazon basin * Amazon River, in South America * Amazon (company), an American multinational technology c ...

's "last mile" delivery drivers and

FedEx FedEx Corporation, formerly Federal Express Corporation and later FDX Corporation, is an American multinational conglomerate holding company focused on transportation, e-commerce and business services based in Memphis, Tennessee. The name "Fe ...

's ground delivery drivers.https://uidl.naswa.org/ds2/stream/?#/documents/64/page/2

References

External links and resources

"IRS Offers Tips on How to Correct Reporting of Misclassified Employees", ''irs.gov'', March 27, 2006
* ttp://newstandardnews.net/content/index.cfm/items/3428 "FedEx Drivers Fight for ‘Employee’ Status, Rights", Megan Tady, ''The NewStandard'', July 18, 2006br>"Sebelius Announces Campaign to Ensure Fairness for Kansas Workers and Businesses", ''infozine.com'', July 11, 2006
*[https://www.nytimes.com/2014/08/17/technology/in-the-sharing-economy-workers-find-both-freedom-and-uncertainty.html? "In the Sharing Economy, Workers Find Both Freedom and Uncertainty", Natasha Singer, ''New York Magazine'', August 16, 2014]
"I was 1099’d: Employer Liability for Independent Contractors in the Service Sector", Melinda Pilling, ''Rukin, Hyland, Doria & Tindall'', October 8
https://scholar.google.com/scholar_case?case=12156401043773771981&q=abc+test+independent+contractor&hl=en&as_sdt=2006 {{DEFAULTSORT:Misclassification Of Employees As Independent Contractors United States labor law Tax avoidance Taxation in the United States