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By: Helios on May 18th, 2010

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Worker Misclassification: Risky Busines

Risk Management | Best Practices

Christine Poulias, Helios HR

Worker Misclassification: Risky BusinessUnder the Obama Administration the Department of Labor is teaming up with the Department of the Treasury to crack down on employers who misclassify their workforce. In addition, the Internal Revenue Service has launched a program that will randomly examine 6,000 companies over the next three years for employee misclassifications. The federal government estimates it will raise $7 billion over the next ten years through tighter enforcement.

As an employer, you are at risk for misclassification if your independent contractors have job duties similar to those of your employees. Misclassifying a worker as a contractor costs the government substantial tax revenue, while the worker misses out on benefits afforded to actual employees. For employers that properly classify workers, the improper classification by other employers means higher unemployment taxes and increased workers' compensation premiums.

Whether a misclassification is intentional or a matter of misinterpretation of legal guidelines, the repercussions are firm and no industry is exempt. Major corporations, including prominent shipping, beverage, cable/broadband and software development companies have all fallen under scrutiny and paid the the tune of millions of dollars. And it's not just the big fish being challenged. Smaller businesses have not only paid fines, but have been banned from the public procurement process as well.

So what's an employer to do? If you are concerned that you may be at risk, consider the following*:

  1. Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Are the business aspects of the worker's job controlled by the payer? (How worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Are benefits (i.e. pension plan, insurance, vacation pay, etc.) offered? Will the relationship continue? Is the person performing work that is considered a key aspect of the business?

If it is still unclear if the worker is a contractor or an employee, visit to file a form SS-8 so the IRS can make an official determination on the worker's status.

* Source:,,id=99921,00.html