Contract Employees

In case you missed it, USA Today recently reported on the rise in litigation associated with misclassified workers. The number of worker class-action lawsuits claiming that employers misclassified employees as independent contractors rose 50% this year. That's an increase to a record 300+ cases.

Let's talk about the financial impact. The Department of Labor forced employers to pay $6.5 million in back wages to over 5,000 employees in fiscal 2010. That's a sharp increase from the $2.6 million owed to over 2,000 employees last year.

Companies increasingly use contractors to meet peaks in demand and complete short-term projects. According to Barry Asin, president of Staffing Industry Analysis, the portion of contingent workers in the labor force is up to about 10% from 8% five years ago. Using contingent workers usually cuts labor costs (unemployment taxes, workers' compensation, health care and other benefits) by about 30%. However, when you look at the number of lawsuits and related penalties, misclassification is a serious issue.

Whatever title used, the issue at hand is whether a worker is an employee or an independent contractor. The answer is determined by the level of control the employer has over the activities of the individual.

Texas Workforce Commission offers an Independent Contractor Test based upon the IRS "Twenty Factor" test. The test determines the amount of control the employer has over the individual. An independent contractor is self-employed, bears the responsibility for his or her own taxes and expenses and is not subject to an employer's direction and control. The IRS has recently attempted to simplify and refine the Twenty Factor test. The test has been reduced to eleven main tests and organized into three groups; behavioral control, financial control and type of relationship.

If you have difficulty in determining the status of an individual, always consult a knowledgeable labor and employment law attorney.