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Employee or Independent Contractor? How to Avoid Misclassification in the Gig Economy

August 4th, 2017 Christopher Davis

In today’s labor market, where short-term contracts and freelance work are far more common than in the past, the correct classification of workers is crucial in determining whether or not a worker will receive benefits normally provided to employees. At the same time, in an effort to save on labor costs in a tough economy, employers are increasingly misclassifying employees as independent contractors, as doing so would save the company a great deal of money in benefits, overtime wages, and taxes.

Importantly, it does not matter if your company or job description defines your employment as 1099 contractor or temporary hire.  The law says that the realities of your work arrangement will be used to judge whether or not you are a W2 employee or a 1099 contractor, and not your title, job description, or your company’s self-serving explanations.

The stakes can be very high. For example, if each employee of a company is responsible for paying 15% of their income for Social Security and Medicare taxes, the individual employee would provide 7.5% of their income while their employer would match it for a total of 15%. Yet if a worker is instead misclassified as an independent contractor, the worker is solely responsible for the 15% tax, in addition to missing out on any additional legal protections and benefits granted to employees, including overtime pay, workers’ compensation insurance, and unemployment insurance. Considering a situation like this, it is important to discover if you are truly an independent contractor or if you are an employee who is being misclassified.

How Can You Tell If You Are Misclassified?

According to the many of the IRS’s standards for employees, here are a few ways to discover if you are an employee rather than an independent contractor:

-You work under someone else

-You are paid hourly

-You work at your employer’s address

-You have your own desk or work station

-You have set hours

-You use your employer’s tools, computers or other equipment

-You meet with clients on behalf of your employer

-You perform a service that is an integral part of the employer’s business

However, you may be considered an independent contractor if:

-You are responsible for setting your own hours

-You do not work under anyone else, but you can receive guidance from someone else

-You work from a location of your choosing

-You use your own tools, computers or other equipment

The law surrounding this issue is not so black and white, so here is some more information from the US Department of Labor regarding the intricacies of this issue:

-You are not an independent contractor under the Fair Labor Standards Act (FLSA) simply because you work offsite or from home with some flexibility over work hours

-Whether you are paid by cash or by check, on the books or off, you may still be an employee under the FLSA

-Signing an independent contractor agreement does not make you an independent contractor under the FLSA

A Case of Misclassification

Recently, several Uber drivers have filed a class action suit against the popular ride-sharing service for misclassifying the drivers as independent contractors. The drivers believe themselves to be classified as employees, and thus are owed reimbursement for out of pocket expenses like gas and vehicle maintenance. One plaintiffs’ attorney for the class action suit remarked that for many workers, driving for Uber is their “livelihood” and that they should be granted the same employee privileges as “everyone else.” Notably, Uber drivers must abide by Company regulations and standards of conduct, as is the case with most employees.  

However, as the company argues drivers benefit from certain aspects of contractor status. Part of what makes working for Uber appealing to many is the ability to make your own hours and to “be your own boss.” Classifying workers as employees might strip drivers of this luxury.

How to Handle Misclassification

Each potential misclassification issue is fact and state specific. New York independent contractors will be subject to different standards than New Jersey.  So speaking with an expert is important.  Continuing your position as a misclassified worker can have disastrous effects, as you are subject to miss out on important benefits and may be forced to shoulder a tax burden that should be shared with your employer. If you suspect you may be misclassified by your employer, familiarize yourself with your rights under the Fair Labor Standards Act or contact an attorney who can assist you in this task. The Law Office of Christopher Davis is happy to assist in this matter as well as all other employment law matters. Contact us today at (646) 430-7930.