3 Costly Mistakes to Avoid with 1099s
Employee or independent contractor?
Are you playing a dangerous game? Or just in the dark on this potential HR disaster?
“Of course my independent contractors aren’t employees”… at least that’s what FedEx, GrubHub, and All Star Staffing said before they had to pay millions in back pay, penalties, fines, and legal fees.
Regardless of the situation, it’s time to get clear on the rules…
It’s a new era in compliance for the U.S. DOL as it relates to the classification, or should I say misclassification, of employees. The government is serious and they want some of the action.
How serious? To show their commitment to this issue, they’ve dedicated a website to employers and workers. It serves as both a resource and whistle blowing mechanism. So it’s clear they aren’t messing around.
Your misclassification can be costly, so it’s best to double check the rules before you get mixed up in one of the costly mistakes:
Mistake #1: Getting Investigated by the United States Department of Labor
Are you paying workers as 1099s that are really employees? If the U.S. DOL or State department questions your classification of workers, you will expose yourself to a lengthy and painful audit.
Specifically, they will be investigating 3 things: behavioral control (are you giving them tools, rules, and direction?); financial control (do they have separate investment, expense, and opportunity for profit or loss?), and the relationship of the parties (are there benefits or contracts in place?).
Wrongful classification can put you at risk for back pay, taxes, penalties, and fines.
How do you know if you’re unsure?… Check out the determination factors here.
Mistake #2: Getting caught when your 1099 files an unemployment claim
If your independent contractors look for unemployment compensation, get ready for your state Department of Labor office to make a visit. And friendly may not be the word to describe their internal investigation of your workers.
From there, you may find yourself in a class action or individual lawsuit and be taken to court. Again, your behavioral control, financial control and the relationship of the parties will all come into question.
If found guilty, you will not only have to pay back wages and overtime owed, but a variety of penalties including FICA, FUTA, benefit contributions or the value of lost benefits, interest, other damages, and/or attorney fees.
Mistake #3: Insurance mayhem when your injured 1099 wants worker’s compensation
Misclassified employees who are injured on the job is cause for alarm, especially if they start looking for worker’s compensation.
If those workers, who would normally rely solely on workers’ compensation benefits to recover, are seriously injured they will be looking for payment…and end up filing a negligence claim against you to get it.
This one mishap will send up a red flag to the insurance company, AND you may get reported to the U.S. DOL and your state DOL. Review mistakes one and two on why this is a bad idea.
Misclassifying employees is a costly-mistake that can happen to any company if they aren’t paying attention. It also happens when companies try to skirt the rules. In either case, the ride isn’t worth the fall. So, if you haven’t reviewed your situation lately or if your 1099’s are in shades of gray, you need to ask yourself: how much am I willing to risk or lose just to avoid paying taxes?
And start with the DOL website it’s a great resource to keep you out of trouble.
If you have questions or need expert advice regarding misclassification of employees… just reach out. That’s what I do.
I started The Payroll Gal to help you make smart educated decisions on payroll, HR, and benefits and to get the best deal.
I can be reached at www.thepayrollgal.com