Independent Contractors and Payroll Taxes

Labor & Employment Law Articles

Independent Contractors and Payroll Taxes

The New York Times recently reported (see attached article) that the Department of Labor plans to crackdown on companies that illegally misclassify workers as independent contractors. A recent study reported that 704,000, or approximately ten percent, of the seven million private sector workers in New York State were misclassified as independent contractors. This study estimated that this misclassification resulted in the state being shortchanged $175,000,000 in unemployment taxes each year.

This crackdown makes it all the more important for employers to understand recent changes to New York’s Workers’ Compensation Reform law. Under these changes, employers who underreport payroll or misrepresent the duties of employees to avoid proper classification are deemed to have not obtained workers’ compensation coverage and are subject to the same penalties as employers who do not have workers’ compensation coverage. While the first violation by employers with fewer than five employees remains a misdemeanor with fines of up to $5,000, violations by employers with more than five employees are now Class E Felonies, with fines ranging from $5,000 to $50,000. Second violations are felonies, regardless of the size of the employer.

Employers will be subjected to the Department of Labor’s heightened scrutiny regardless of whether they misclassify workers intentionally or unknowingly. Therefore, below are twenty factors commonly used to determine whether a worker is an independent contractor or an employee. To avoid such penalties, we recommend that you review these factors and use them as a guide to help determine the proper classifications for your workers. We will continue to monitor this situation and keep you apprized of any developments that may affect your business.

f you have any questions about this memorandum, please do not hesitate to contact us.

Instructions: Instructions from the business on how to do the work prove control over manner and means of performance.

Training: The more training a business must give a worker, the more the worker looks like an employee.

Integration: If the worker’s services are an integral part of business operations, the worker looks more like an employee.

Services Rendered Personally: If the worker may do the work with helpers, the worker looks more like an independent contractor.

Hiring, Supervising, and Paying Assistants: If the firm hires, supervises, and pays individuals to assist the worker, the worker looks more like an employee.

Continuing Relationship: The longer and more regular the worker’s relationship to the firm, the more the worker looks like an employee.

Set Hours of Work: If the firm sets the hours the worker must work, the worker looks more like an employee.

Full Time Required: Workers who must work full time for a business look much more like employees.

Doing Work on Firm’s Premises: Workers who must work at the premises of a business look more like employees.

Order of Sequence Set: If a business requires that a worker follow schedules and routines that it sets, the worker looks more like an employee.

Oral or Written Reports: If a worker must submit periodic reports, the worker looks more like an employee.

Payments By Hour, Week, Month: Workers paid regularly look more like employees; workers paid by the job look more like independent contractors.

Payment of Business and/or Traveling Expenses: Workers who pay their own expenses look more like independent contractors.

Furnishing of Tools and Material: Workers who furnish their own tools and materials look more like independent contractors.

Significant Investment: Independent contractors almost always have a significant investment in their business.

Realization of Profit or Loss: Workers at risk of loss look more like independent contractors.

Working for More Than One Firm at a Time: Workers who provide services to many firms look more like independent contractors.

Making Services Available to the General Public: Workers who make their services available to all look more like independent contractors.

Right to Discharge: Independent contractors can usually be discharged, without recourse, only under the terms of their contracts; at least in theory, non-union employees generally can be fired at the employer’s will.

Right to Terminate: Employees can quit without recourse by the employer; independent contractors often will be penalized if they terminate their work before it is complete.