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States suffer in trend of misclassifying employees as contractors

The question of whether workers are the legal employees of or independent contractors for the companies they work for is important to individuals, because independent contractors are often paid much less and are not entitled to benefits. It's also important to the government because businesses don't pay employment taxes for contractors.

Workers aren't contractors simply because their employers say they are -- there are legal rules in the federal Fair Labor Standards Act and in the laws of many state, including Minnesota. Yet in a tight economy, workers who feel their backs are against the wall often accept being labeled independent contractors when their jobs don't qualify for that treatment. Unscrupulous employers can save thousands with each employee they misclassify, and honest companies find it hard to compete fairly.

"It is fraud plain and simple that drains governments at every level of much needed revenue," said a spokesperson for the National Employment Law Project, a worker advocacy group.

Unfortunately, a recent report from the Treasury Department's Inspector General for Tax Administration found that "the misclassification of employees as independent contractors is a nationwide problem affecting millions of workers that continues to grow." If a worker earns a salary of $43,007, the report found, an employer can save about $3,710 in annual federal employment taxes alone by misclassifying him or her as a contractor.

Basically, contractors are people who own their own businesses, have several clients, and control their own hours and performance on specific projects. Legally, workers who perform work under the same basic conditions of employees are not contractors, regardless of what they are told.

Misclassification has been a growing problem for several years. As we discussed on this blog in May, the number of federal lawsuits brought by workers complaining of misclassification and other wage and hour violations has reached a record high last year.

The Labor Department has prioritized such cases, and it appears that states are beginning to crack down, as well. As one law professor said, "The success at identifying those employers has led to pretty substantial revenue for the states."

As many as one third of all employers may be engaging in worker misclassification, either as contractors or as salaried employees when they are entitled to hourly pay and overtime. If you feel you may be losing out to unlawful employee misclassification, consider discussing your legal options with a knowledgeable employment law attorney.

Source: Insurance Journal, "States Going After Employers Who Misclassify Workers as Independent Contractors," Jim Efstathiou, Jr., Oct. 18, 2013

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