WORKER CLASSIFICATION

The legal battle over which workers can be classified as independent contractors versus employees is nowhere near close to over. Wherever the battles land, one important fact remains: The IRS takes the practice of hiring independent contractors very seriously. That means companies should, too.

Misclassification Costs Businesses Money

While hiring an independent contractor is attractive for the potential money savings that come with outsourcing work that is not central to their main line of business, mistakes can quickly override any savings.

The IRS has very strict guidelines that define true business-to-business relationships. These guidelines are meant to prevent firms from misclassifying would-be employees, thereby avoiding a bounty of state and federal taxes. Making a misstep can be costly—whether it was intentional or not.

There is big-time tax money at stake. According to the court’s ruling on the landmark worker classification Dynamex decision, “the misclassification of workers as independent contractors rather than employees is a very serious problem, depriving federal and state governments of billions of dollars in tax revenue.” That’s billions with a B.

Small businesses can avoid certain taxes with fewer employees and independent contractors can write off business expenses and may also underreport their income. Hence the resulting “deprivation.” The IRS is motivated to recoup those lost dollars.

Misclassification Wastes Time

Audits and court costs alone are expensive and time-consuming even for businesses that do everything by the book. If you’re found in error, back pay adds up quickly. How much are you willing to pay in time and hassle alone?

Save the Hassle

If you have any questions about independent contractor status, trust PayReel to help you make the determination. We screen each employment situation carefully to assess the entire e relationship to make sure you are in complete compliance. 

Call us at 303.526.4900 or email info@payreel.com.

Accurate worker classification is important for any company but those with a contingent workforce are especially vulnerable to making missteps. It’s a topic the Biden administration is paying attention to as well. The administration’s recent decision to rescind the “Worker Classification Rule” makes it easier for workers to argue for minimum wage and overtime protections/compensation.

Big company missteps=Big headlines

You’ve probably seen employee misclassification news about the big companies like Uber and Lyft. With the big headlines, you’ll find big fines: often in the multimillions. But while it may be tempting to think of this as a big company problem, it’s not true.

Think misclassification woes only happen to the big kids? Think again.

You might see headlines about worker classification missteps from brands you recognize, but between increasingly-savvy workers and a Democratic-led administration, the smaller companies are at risk too. Small companies are vulnerable to big problems, too. For example, this at-home healthcare services provider was recently found responsible for over $358K in back wages.

The Bottom Line

It just isn’t worth it to try to avoid the rules or get away without knowing them. You can be held responsible whether you’re a big company or a small one. Between savvy workers and a worker-friendly administration highly focused on worker classification, paying close attention to accuracy pays dividends.

The New Administration, Worker Classification, And Protecting Your Business

So what does it mean for you?

The bottom line

In the aftermath of the landmark California Supreme Court ruling, there’s much more attention on the W2 employee v. independent contractor debate. That makes it all the more important that companies don’t misclassify a worker — and more costly when they do.

Here’s what you need to know about misclassifying employees:

IT’S A NEW WORLD 

The gig economy, start-up culture and the rapid growth of the independent workforce combined have caused a dramatic increase in scrutiny by government agencies to ensure workers are appropriately classified. 

Updates to the ABC test for worker classification have resulted in the narrowest definition of an independent contractor to date. It’s now even more crucial for companies to evaluate or reevaluate the way they classify employees and get on the right side of the law before the ruling’s ripple effect reaches their headquarters.

EMPLOYEE CLASSIFICATION RULES MATTER

You can’t ignore worker classification rules. And for the companies that do, there’s a potential multimillion-dollar price tag.

Unfortunately, “We didn’t mean to” doesn’t hold up in court. Whether you knowingly or accidentally misclassify employees as independent contractors (ICs), it’s considered wage theft.

Committing wage theft has some serious consequences. According to the ruling, businesses that misclassify workers as independent contractors deprive federal and state governments of billions of dollars in tax revenue. Big Brother is watching and Big Brother wants its money.

Misclassifying an employee puts your business at risks of an IRS audit. In addition to monetary fines like back pay, back taxes, severance and healthcare coverage for misclassified workers, you could also be looking at legal fees, reputation damage and even criminal and civil penalties.

For example, if you’re found guilty of fraud or intentional misclassification in Colorado, you “may be fined up to $5,000 per misclassified employee for the first misclassification and up to $25,000 per misclassified employee for a second or subsequent misclassification.” 

Oops, I misclassified an employee. Now what?

CONDUCT INTERNAL AUDITS

Conduct an internal audit on your company’s policies and documentation process. Run each worker through the ABC test to determine if they really are an IC or not. Look for areas that need improvement. If you’re missing any documentation (like signed contracts), take any steps to get what you need. If you think you’ve misclassified a worker, make sure you carefully document any changes you make. 

Sometimes, you can run your internal audits and still not feel confident you have the right status. If that happens, you can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. To be safe, you should treat the worker in question as an employee.

Not sure if you’re classifying your employees the right way? Take our five-minute worker classification self-audit and review our worker classification compliance best practices to determine just how independent your ICs are.

HOW CAN I AVOID MISCLASSIFYING MY WORKERS?

Worker roles can evolve over time, as do the rules around worker classifications, so it’s a good idea to review each worker’s classification annually and make adjustments as needed.

That’s a lot of work, which is why many organizations that contract ICs partner with an Employer of Record—a firm specializing in independent contractor compliance and engagement. An Employer of Record helps your company meet compliance standards, reduce misclassification risk and successfully manage independent workers. That’s exactly what we do at PayReel.

LET PAYREEL HANDLE YOUR EMPLOYEE CLASSIFICATION

PayReel will help you manage your workers so your business can focus on doing what it does best. As your Employer of Record, PayReel will help ensure that all your freelance ICs are properly classified and your business stays ahead of the compliance curve. There’s no need to gamble with something so important. Contact us today! You can call us or email.

Laws around worker classification are getting extra attention right now. Some people are even expressing concern that proposed changes threaten free press. We thought it was high time to address some of the myths that get businesses in trouble. Read to the end for the super good news!

Worker Classification Myth #1: After a certain amount of time working for you, an independent contractor must be reclassified as an employee.

It’s true that rules can be complicated and vary from state to state. Still, this perception overly complicates the issue. We think this myth likely comes from one-time best practices wrongly interpreted as hard and fast rules. Wherever the myth comes from, we’ve seen clients build all sorts of policies to get around the supposed law. We’ve seen them hire workers for six months, drop them for a period of time, and then rehire them, for example. Some companies even refuse to rehire independent contractors after working with them for a certain amount of time because they’re afraid they’ll have to provide all of the benefits associated with hiring an employee. Not only are these policies time consuming, they can hurt businesses that rely on trustworthy freelancers.

There is a fine line between an employee and an independent contractor and laws surrounding worker classification are confusing. Still, we’ve seen companies get unnecessarily complicated—going to great lengths to comply with nonexistent rules. We think it’s time for everyone to bust the myth and bust free from self-imposed restrictions.

Here’s the liberating truth: If you find a good contractor and want to use them over and over, you can. There are rules, which vary by location, but there are also legal ways to keep your best people working for you.

Worker Classification Myth #2: I don’t need to waste my brain space to understand the rules.

Maybe this one persists not because of misinformation but simply because we want to believe it. Sort of like the 5-second rule? Both are bogus, by the way.

When laws change frequently, big money is on the line, and rules are complicated/vary from state to state, it’s tempting to ignore the issue until it shows up on your doorstep dressed in red with a pitchfork and horns. So much braining.

Sorry to burst your bubble, but even if you’re not in California, this thing affects you. That’s not only because other states, including New York and Michigan, are thinking about making changes too, but also because every state has its own rules. These rules can affect everything from the price you pay on a ride-sharing app to where and how you get your haircut.

The consequences for businesses who don’t comply can be damaging to your reputation and pocketbook (fines, fees, and lawsuits, oh my!).

The Liberating Truth: You Don’t Have to Know it All

This truth will save your brain (along with your wallet and your reputation) is that no matter where you are, you cannot afford to ignore worker classification rules. There’s another happy truth, though: If you don’t want to/can’t get into the nitty-gritty details yourself, you can rely on a qualified partner (👋) to do it for you. Reach out to our team of experts on all things freelance. Get away from the burden of onboarding, payrolling and classifying your workers and focus on what you love.

Pumpkin spiced lattes! Babies! Generation Z (move over, Millennials)! What do they all have in common? They’re a constant reminder that there’s nothing so constant as change. With its ever-narrowing definition of an independent contractor, California is embarking on the real-time evolution of the gig economy. Here’s the chain of events a company and its workers might go through in response to such changes.

When the definition of an independent contractor narrows:

1. Companies reclassify employees… or not

When an independent contractor becomes an employee, her pay structure changes. Even if all the goodies afforded an employee (healthcare, time off, etc.) bring them close to their original pay in practice, their paycheck may look a lot smaller. That’s because it costs a lot more upfront to have an employee and employers withhold taxes. While ICs are still responsible for paying taxes, they can also take advantage of many write-offs, which go out the window once they’re employees. Some employers like this structure, feeling it gives workers more ownership in the company’s success. Others say the structure makes their business model unsustainable.

In the latter case, they may restructure the job completely to avoid hiring more employees. Because often new laws precipitate more ways to get around those laws. Another way to avoid reclassifying is to simply operate business as usual and wait to be challenged. Especially in the case of smaller companies, history shows this could take years or not happen at all. Workers might not know or care about the changes. They may opt not to push out of fear or they may not be able to join together to get strong enough influence. This is a risky approach, but not unheard of.

2. Workers quit or stay

Once employers make their choice, employees make their own. If companies do decide to reclassify workers as employees, they then decide if the situation works for them. If not, they often quit (as we discussed in our last post). Some stay, preferring the stability that comes with being an employee.  Some may even get promoted under the new arrangement, as this article talks about in the case of Matthew Johnson, who’d been driving for several companies before becoming an employee at Perennial. With a greater presence at the office and familiarity with the ins and outs of his company, Johnson was able to make helpful suggestions that earned him new responsibilities and promotion.

Many employers and workers alike viewed the previous arrangement as a symbiotic relationship that worked well for both the business owners and the workers they employed. So if their bottom line becomes unacceptable, workers may tap out and either increase work for their other clients or look for different work altogether.

3. Everything changes

No matter what happens, everything will change. This latest evolution in the economy will be replaced with another, which will upend the last. And so it goes. Again and again and again.  Tell it to the Gen Zer who has never burned a CD before. She still thinks she’s going to be young forever.

Note: Can’t get enough? We’ve covered misclassification in depth. See more here.

About PayReel:

At PayReel, we minimize the time and effort it takes to get you ready for your project. Rely on PayReel to assume all of the risks associated with worker classification and get back to the business at hand. We make sure you get everyone gets paid quick and easy, and have Client Relationship Managers on call around the clock to answer your questions. All you have to do is call 303-526-4900 or email us. The PayReel team makes live events, corporate media, and brand management payroll easier, faster, and seamless.

Is the ABC rule the beginning of the end?

California—home of eternal sunshine and landmark lawsuits. One of the state’s most recent rulings, in the Dynamex Operations West Inc. v. The Superior Court of Los Angeles County case, resulted in some changes to the ABC test for worker classification. While the test has existed in some form for decades, this iteration eliminates some of the gray area in deciding whether a worker is an employee or not. It’s the narrowest definition of an independent contractor to date.

This ruling has already caused major changes in the Golden State and, if history is any indicator, may have a cascading effect for the rest of us. We hear a lot about worker classification and the big dogs—the Ubers and the FedExes of the world. Today, we’re looking into what it means for the mom and pop shops and the workers they employ.

What is the ABC test for worker classification?

In California, a worker can now be considered an independent contractor only if all of the following apply:

A: the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

B: the worker performs work that is outside the usual course of the hiring entity’s business; and

C: the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Okay, so what’s at stake?

According to the court’s ruling, “the misclassification of workers as independent contractors rather than employees is a very serious problem, depriving federal and state governments of billions of dollars in tax revenue.” Read: money. For the government, tax dollars are a big part of the equation. Small businesses can avoid certain taxes with fewer employees and independent contractors can write off business expenses and may also underreport their income. Hence the resulting “deprivation.”

And for small businesses such as salons? Well it’s the B of the ABCs that’s upsetting the mom and pop apple cart because their workers perform work that is decidedly within “the usual course of the hiring entity’s business.” According to the business owner in this article, the previous model allows them to keep their doors open. They say they can’t afford to pay their workers as employees and provide the benefits required by law. So with the switch, many of this business owner’s workers quit overnight. Many employers and workers alike viewed the previous arrangement as a symbiotic relationship that worked well for both the business owners and the workers they employed.

This website, for cosmetologists, describes the benefits independent contractors have in the “booth rental” model. Like any independent contractor, they set their own schedule and manage their own business. They also keep any earnings beyond their booth rental fee. That means the harder they work and the more loyal clients they secure, the more they earn. As part of the salon, they get the benefit of the establishment’s marketing as well as possible walk-in clients. On the flip side, they also have the not-so-sexy responsibilities that come with owning their own business. They run their own books, pay quarterly taxes, advertise to get their chair filled, purchase their own equipment, and deal with the seasonal nature of the biz. Independent contractors also don’t get paid time off and are responsible for purchasing their own health insurance.

What about the workers?

Okay, so what’s a hairstylist to do? Well, the rule purportedly intends at least in part to protect them and provide “the labor law protections to which they are entitled.” But some are concerned about what the change means for their livelihood. If you spend a little time reading threads dedicated to salon workers and truckers, who often work as independent contractors, you’ll find discussions among people trying to figure out how to navigate this new landscape.

They may choose to accept the lower pay along with the guarantees and security that come with being an employee. That is, if traditional salons operating under the booth rental model decide to stay open. Or they can set up their own truly independent businesses, perhaps operating out of their homes and skipping the salon altogether. This will work better for those with an existing loyal client base. For those just entering the field, it remains to be seen.

Bottom line

If you’re outside of California, don’t think this doesn’t directly affect you. Other states are already starting to use the ABC test too (i.e. Illinois, New Jersey, Maine and Massachusetts). And this isn’t just about salons. Many other operations, from physical therapists to those delivering packages to your door, are affected by this change. Often, in cases like these, one landmark case paves the way for others to follow—begrudgingly though the case may be. So even if you don’t personally feel the effect of the changes, you probably will before long. And what about your haircuts? Are you ready to go to your stylist’s home? Soon, it may be one of your only choices for the services you know and love.

Note: Can’t get enough? We’ve covered misclassification in depth. See more here.

About PayReel:

At PayReel, we minimize the time and effort it takes to get you ready for your project. Rely on PayReel to assume all of the risk associated with worker classification and get back to the business at hand. We make sure you get everyone gets paid quick and easy, and have Client Relationship Managers on call around the clock to answer your questions. All you have to do is call 303-526-4900 or email us. The PayReel team makes live event, corporate media, and brand management payroll easier, faster, and seamless.