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Employee or Independent Contractor?

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Deanna Swisher
Foster Swift Agricultural Law News
January 29, 2016

If you have someone work for you, then you, the employer, need to determine whether you have hired an “independent contractor” or an “employee.” “Classification” is the term employment lawyers use to sort out whether the worker is an employee or an independent contractor. Classification has very important legal and financial implications for you, the farm or business owner.

Classifying a worker as an employee requires that you, the employer, withhold income taxes and pay one-half of FICA tax, federal and state unemployment taxes, maintain workers’ compensation insurance and make numerous filings during the course of the year. In light of these tasks and expenses, farmers and small business owners are quick to resist the reality that their worker should probably be classified as an employee when calling them an independent contractor seems so simple.

The independent contractor takes care of their own tax obligations. You, the business owner, must report payments to your independent contractor via a 1099. As a result, new and small businesses and certain industries have been inclined to hire “independent contractors” as though it is simply an option that allows them to avoid a lot of paperwork and tax withholding.

However, if a governmental agency finds that you have “misclassified” an employee as an independent contract, you will be in a very difficult, expensive position. Governmental agencies, to include the IRS and Department of Labor, Michigan’s Unemployment Agency and Department of Treasury may cooperate and share information. So, if one agency questions your classification, it may work with other agencies to maximize recovery of money that is payable to any government entity.

But how will they know? Even if you have obtained the worker’s signature on a well-drafted independent contractor agreement, what is likely to happen if they stop receiving work from you? Will they file a claim for unemployment compensation? If they get hurt “on the job” would they seek workers’ compensation? Either of these occurrences will subject your classification to rigorous scrutiny.

In 2015, the U.S. Department of Labor ("DOL") reacted to numerous complaints to the Department of Labor’s Wage and Hour Division by workers asserting that they have been misclassified.  As Administrator David Weil explained in his Administrator’s Interpretation, No. 2015-1, when an employee is improperly classified as an independent contractor: the worker does not receive the benefit of workplace protections, such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation; government see lower tax revenues; employers who properly classify are disadvantaged by an uneven playing field.  Under Administrator Weil, the DOL was, in no uncertain terms, making effort to rein in misclassification and to bring enforcement actions.  While the current DOL administration has "withdrawn" its 2015 guidance on this topic, the DOL asserts that removal of this prior Interpretation does not change the legal responsibilities of employers under the Fair Labor Standards Act ("FLSA") or Migrant and Seasonal Agricultural Worker Protection Act.