You don’t have a 1099 employee, so stop misclassifying them

November 25, 2023

Too often I hear the term, “Well, she’s a 1099 employee.”

No she isn’t. There is no such thing.

Employers need to stop classifying workers as independent contractors. They usually aren’t contractors – they are employees – with all the benefits and employer obligations that go along with that. They can be part-time and occasional employees – but they are still employees.

You can’t contract your way out of it. I hear all the time, “Well she wanted to be an independent contractor and we signed an agreement making it so.” That doesn’t count if, by law, the person is an employee and not an independent contractor.

The risks of misclassification are significant.

Last month, the United States Department of Labor (DOL) announced that it received $532,000 in back wages for 67 workers after an Alabama home health care organization, Montgomery Home Care (doing business as Jennings Professional Services), misclassified them as contractors.

According to the announcement, those misclassified workers incurred overtime wages that went uncompensated.

The announcement stated that the company “paid the affected employees straight-time rates for all hours worked. By doing so, the employer denied the workers — who care for sick and older adults — their additional half-time rate for overtime for hours over 40 in a workweek, in violation of the Fair Labor Standards Act. In addition, the employer failed to keep accurate pay records as required.”

Home health care is on the radar of the Department of Labor for labor violations. In fiscal year 2022, the DOL concluded more than 1,100 investigations in health care industries and recovered approximately $15 million in back wages for more than 22,000 workers.

The problem with misclassification isn’t just one in any specific industry, however. It’s all industries.

This is such a problem that in 2020, Virginia passed legislation that provided for a private right of action against an employer for misclassification.

The law states that “an individual who performs services for a person (including an employer) for remuneration shall be presumed to be an employee of the person that paid such remuneration, and the person that paid such remuneration shall be presumed to be the employer of the individual who was paid for performing the services, unless it is shown that the individual is an independent contractor as determined under the Internal Revenue Service guidelines.”

Thus, it is a presumption or default that anyone performing services is an employee, unless proven to be a legitimate independent contractor. It’s not the other way around.

The IRS Guidelines are a bit different than those from the United States Department of Labor in determining whether a person is properly classified as an independent contractor. The somewhat-complex IRS guidelines focus on control.

According to the IRS website, “People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

According to the IRS, “If you classify an employee as an independent contractor and you have no reasonable basis for doing so, then you may be held liable for employment taxes for that worker.”

The IRS states that employers should consider whether the company controls or has the right to control what the worker does and how the worker does the job and whether the business aspects of the worker’s job are controlled by the payer, considering things like how the worker is paid, whether tools and supplies are provided by the payer and whether expenses are reimbursed. Employers should also consider whether there are written contracts or employee-type benefits such as a pension plan, insurance and vacation pay.

The IRS notes, “There is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship and consider the extent of the right to direct and control the worker. Finally, document each of the factors used in coming up with the determination.”

The risks of misclassification are significant. In addition to wage and hour and tax violations, the employer could be liable for injuries sustained because it failed to include the individual in the workers’ compensation policy, or for unemployment because the employer failed to pay into the employment commission.

Also, according to the Virginia Code, an individual can bring a civil action for misclassification and recover damages in the “amount of any wages, salary, employment benefits, including expenses incurred by the employee that would otherwise have been covered by insurance, or other compensation lost to the individual, a reasonable attorney fee, and the costs incurred by the individual in bringing the action.”

Employers must evaluate any workers who are currently “independent contractors” and immediately add them as employees if they do not meet the complex criteria for independent contractors.