The Dangers of Misclassifying Employees as Independent Contractors: Part I

There are many benefits to using independent contractors, including in a veterinary practice, but the risks and penalties are increasingly the subject of litigation, enforcement actions by government agencies, and the subject of other workplace claims. Part I of this two part article will discuss the dangers and risks of misclassifying independent contractors and Part II will discuss how contractors are classified under California law.

Common Misconceptions about Independent Contractors
Many employers believe they will be safe from the significant penalties of misclassification if their relationship meets any of the conditions listed below. This is not the case. Hiring organizations are not immune just because the worker:

    • Wanted to be treated as an independent contractor
    • Signed a written contract
    • Does assignments sporadically, inconsistently or on-call
    • Is paid commission only
    • Has no supervision
    • Performs assignments for more than one organization

While some of these can be significant factors in discerning whether or not a worker is properly classified as an independent contractor, none is conclusive. This will be discussed further in Part II of this article and is the subject of much litigation.
Potential Risks of Misclassification
An employer that misclassifies a worker as an independent contractor faces problems in a number of different areas. Mislabeling a worker as an independent contractor creates potential liability for employment taxes and penalties, and liability for failure to fulfill the many legal obligations owed to an employee, such as wage and hour requirements and workers compensation coverage. In addition, misclassified workers may bring wage, overtime and other Labor Code claims in court. In addition, California administrative agencies and the Internal Revenue Service (IRS) closely scrutinize alleged principal/independent contractor relationships to ensure that those relationships are not, in reality, employer/employee relationships.
The real surprise for most employers is that they do not see this challenge to a worker’s status coming, and then it is too late. Challenges to the legitimacy of an existing independent contractor/principal relationship can arise in many forms, including:

    • Filings for unemployment insurance (UI) benefits
    • Claims for unpaid wages
    • Claims for workers’ compensation
    • Charges of employment discrimination
    • Investigations by the IRS and Employment Development Department (EDD) to audit wage payments, workers’ compensation coverage and Unemployment Insurance Fund contributions
    • Civil litigation
    • Workers compensation or other injury claims

Because the issue of independent contractor misclassification can arise under many different scenarios, it is important for employers to comply with the law and to seek legal counsel to do so. And effective July 2012, the penalties for misclassification are even more severe.
In Part II of this article, we will discuss how independent contractors are classified, the factors that the courts and government agencies use in classifying them, and some tips to avoid the misclassification consequences discussed above.