A very common and expensive error that a business owner can make is to misclassify an “employee” as an “independent contractor”. There are a number of classification tests applied in New York State that are used to determine a worker’s status. The analysis of each test depends on different factors and variables which can be hard to navigate.

Modern day business owners are expected to know all relevant employment laws regardless of the owner’s education or professional background. As such, it can be extremely stressful to hire individuals to perform work for the business, and the issue of properly classifying such workers may be overwhelming.

Examples of the tests used to determine employee status:  

  • New York courts tend to use the common law test but will typically use the overall control test to determine independent contractor status of certain professionals.
  • The Workers’ Compensation Board uses a hybrid version of the right to control test and relative nature of the work test.
  • New York’s Unemployment Insurance Law follows the right to control test.
  • New York Income Tax Law requires New York State businesses to apply the same 20-factor test that the IRS uses to determine employee status for federal tax purposes, and
  • The FLSA does not have a specific rule or test and is currently in the rule making process of creating one.  As such, federal courts tend to take a more expansive view when determining employee status than they would under a common law analysis.

Potential Legal Claims for Misclassification

  • Failure to pay minimum wage or unpaid overtime under the FLSA and New York State Labor Law (NYSLL),
  • Failure to reimburse work-related expenses under the FLSA and NYSLL,
  • Unpaid income tax withholdings under federal, state, and local laws plus penalties,
  • Unpaid Social Security, Medicare contributions, workers’ compensation premiums, and  unemployment insurance premiums,
  • Penalties for failure to properly complete Form I-9, Claims for unpaid benefits, and
  • Penalties for failure to comply with ACA reporting or shared responsibility rules.

Notably, the employer bears the burden of demonstrating that an individual is properly classified as an independent contractor. New York State courts have repeatedly held that the parties’ agreement (i.e., the Independent Contractor Agreement) or understanding is not determinative.

 What is New York State’s Joint Enforcement Task Force?

In addition to being investigated by the Internal Revenue Service (IRS) on a federal agency level, a New York State business may be investigated by a number of state agencies through New York State’s Joint Enforcement Task Force. The agencies listed below investigate and enforce claims relating to the misclassification of employees as independent contractors though the Task Force:

  • Department of Labor (DOL), Wage and Hour Division
  • New York State Department of Taxation and Finance
  • New York State Unemployment agency
  • New York State Workers’ Compensation Board
  • New York State Workers’ Compensation Fraud Inspector General
  • New York State Attorney General
  • New York City Comptroller’s Office

An employer who misclassifies workers and breaks New York State Labor Laws can be reported to the Task Force through multiple avenues. For more information about the Task Force, see: DOL Task Force

Financial Costs and Penalties for Misclassification of Employee as an Independent Contractor

Employee and independent contractor rules

  • Back pay, including overtime compensation,
  • Reimbursement of work-related expenses,
  • Unpaid employee benefits,
  • Unpaid disability payments,
  • Unpaid workers’ compensation obligations,
  • Unpaid tax obligations,
  • Unpaid insurance obligations,
  • Liquidated damages,
  • Penalties,
  • Interest, and
  • Attorney fees.

If an employer is found to “willfully” misrepresent employment status, then the business may face even harsher penalties from the IRS alone.  New York State also issues its own fines for misclassifying an employee in addition to federal agencies.

The misclassification of an employee as an independent contractor should be avoided at all costs and is expensive to defend. As such, it is important to be proactive and involve an experienced Employment Law attorney during the hiring process rather than after litigation ensues.

This article is intended for general information and educational purposes only and should not be considered legal advice or counsel. No attorney-client relationship is created by the distribution of this article. The substance of this article is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business. © 2022 Law Office of Regina Sarkis, PLLC.