The Cost of Misclassifying an Employee as an Independent Contractor

Many employers use independent contractors to supplement staff for a temporary increase in workload or to provide a missing skill set for a special project.  If the person is truly an independent contractor it can make good business sense. If, on the other hand, the nature of the person’s work or how they work does not meet the independent contractor criteria, it can be a very costly business decision.

Take, for example, a client of mine who hired a contractor to work on a project that was supposed to last approximately 9 months. The individual presented himself as a self-employed contractor with a business name and business cards. A contract for 9 months was written, and signed by both parties. The contractor worked mostly offsite, but was required to come into the office occasionally for meetings.  When he was in the office, he used the company computer, and he had a company email account.

About halfway through the project the contractor started missing deadlines.  He also missed meetings or would arrive so late that someone else would have to conduct the meeting on his behalf. Finally, management decided to let him go. Here’s where it got sticky. First of all, the contract did not have a severance clause. Secondly, the two parties could not agree on the amount owed to the contractor at the time of termination.

The contractor sought help from the Employee Development Department (EDD), filing for unemployment and also filing a claim that he had been misclassified. The EDD ruled in his favor and the company ended up paying more than $50,000 in back wages and legal fees.

There are two key lessons here: 1) Be sure your contracts are reviewed by an attorney and clearly state the requirements and obligations upon termination. 2) There are a number of factors that determine whether a worker is an independent contractor or an employee. Don’t assume that because the person uses their own equipment and has their own business name that they can be classified as an independent contractor. Become familiar with the classification criteria and consult an HR Professional or employment attorney if you have questions.

Next time we’ll talk about 20 factors you can use to help determine whether a worker is an independent contractor.