Why Classification Status is Important
Whether a worker is an "employee" or an "independent contractor" is critical when it comes to important issues such as benefits and pension eligibility, workers' compensation coverage, wage and hour law, unemployment and many other matters. For example, special rules - designed to protect employees - apply to Workers' Compensation. In determining whether an individual is covered as an employee under the Workers' Compensation laws, the State will inquire, not only whether the worker has the right to control, but also whether the worker is a member of the class targeted for protection by these laws. Care in classification is critical as there is an inherent bias in favor of awarding Workers' Compensation benefits and thus a corresponding tendency to find an employment relationship if such a finding is at all reasonable.
If the Internal Revenue Service (IRS) reclassifies an individual from an independent contractor to an employee, WHOI will be required to pay certain amounts of the employment tax liability that was not withheld due to the misclassification. The potential consequences for violation of the independent contractor versus employee classification cannot be overstated. The worst case scenario can involve a fine and a prison sentence for the employer. At the least, if an employer is found to have misclassified workers as independent contractors, the employer can be assessed for income taxes that were not withheld, and both the employee and employer's share of FICA. The employer will also be liable for FUTA. Another risk is the disqualification of qualified pension plans.
Definition of an Independent Contractor
An independent contractor is defined as a person engaged in an independently established business - a person engaged in an occupation that contracts to work according to their own methods, without being subject to control of the employer except for results. The basic tenent of an independent contractor relationship is that the contractor has an independent occupation and is only responsible for the finished product.