Independent contractors: Don’t let a little bad publicity scare you away

There are plenty of reasons to be scared about hiring independent contractors in the US these days:

  • Fifteen states have partnered up with the federal government to go after employers that misclassify employees as independent contractors;
  • The new US Secretary of Labor has said combatting misclassification will be one of his top priorities;
  • Legislation has been introduced in several states, with one bill being signed into law in Illinois and another awaiting the governor’s signature in New York; and
  • Nearly every week brings news of another successful lawsuit brought by employees who were misclassified, including a recent settlement for $1.55 million in Georgia.

But in this frightening climate, a little perspective is in order:

  • The $18.2 million in back wages collected by the US Department of Labor’s Wage and Hour Division (WHD) during the past two years for minimum wage or overtime violations that resulted primarily from workers not being classified as employees represents only a small fraction, about 12 percent, of the $147.8 million in back wages collected during that time.
  • The WHD plans to prioritize its enforcement actions at high-risk industries, which, it has said, include construction; janitorial; home health care; child care; transportation and warehousing; and meat and poultry processing. Employers that are not in these narrow industries are less likely to be targeted.
  • Employers that make a good-faith error in classifying employees as independent contractors can find a safe harbor from employment taxes if they have a “reasonable basis” for the misclassification – for example, if it is a common practice in their industry or if there was a court precedent. Likewise, employers that believe they have mistakenly classified employees as independent contractors are eligible for partial relief from back taxes under the Internal Revenue Service’s voluntary settlement program if they agree to reclassify the workers as employees going forward.

A good rule of thumb is that it is likely safe to use an independent contractor in situations where you need to control only the result of the work done, not the means and methods of how it is done. A more careful consideration of all the factors involved is in order before moving forward. But prudent employers that could benefit from the flexibility and savings that can come from hiring independent contractors should not rule them out just because of a few horror stories.