Spurred on to address the ever-growing problem of mis-classifying employees on a workers compensation policy as independent contractors many states have reacted, or are reacting, by developing and enforcing stiff statutory penalties for employers who incorrectly classify a worker as an independent contractor.
This is not a new problem but confusion continues to reign supreme on this topic. You might think it’s pretty easy to tell if someone working for you is an independent contractor or an employee but hold your horses right there…it can be complicated.
Various states have been scrambling around now for a while putting together their definitions, specific rules and establishing their guides for implementation of the differences between an employee and independent contractor. Of course with those rules come penalties.
So let’s break it down for just a second. What’s the big deal anyway?
- An employer using an independent contractor typically does not have to collect or contribute to various payroll and unemployment taxes, causing the states to loose revenue in an economic time when every state is scrambling to find every dollar they can;
- If an employer incorrectly classifies an employee as an independent contractor the injured employee may lose their protection under the states workers compensation statutes thus circumventing the laws, in place, designed to protect the employee.
- If an employer incorrectly classifies an employee as an independent contractor the workers compensation insurance carrier may lose premium they were due because of the exposure they had to loss.
- Reclassification at audit can create an unexpected additional cost for the employer.
- Of course there are more issues than these on this topic…
While some states have clarified their stand on this topic, others are still working on it.
Lesson Learned: Be sure to check with your specific state regarding their take on the independent contractor – employee issue. Rules and penalties can be very different from one state to another!