Microsoft famously was forced to pay millions of dollars in back taxes after an IRS audit in 1989-90 showed that certain contract workers were being treated like employees (even after those workers had signed statements agreeing that they were not entitled to Microsoft’s benefits). Later, eight individuals who had been misclassified as contractors sued successfully for back benefits.
Uber in 2016 agreed to settle class-action lawsuits brought by drivers in California and Massachusetts, but a court rejected the terms and the litigation is ongoing. Under the proposed settlement, the company would pay as much as $100 million to hundreds of thousands of drivers who claimed they were misclassified as independent contractors and should have been reimbursed for expenses like gas and vehicle maintenance. Under the settlement, the company would continue to classify their drivers as independent contractors.
The most important step to avoiding similar legal and financial headaches, experts say, is to know the applicable laws (both federal statutes and state laws, which can be stricter). If in doubt, employers should likely err on the side of caution by classifying individuals as employees. The IRS looks at three general factors:
Financial control. How are workers paid? (Contract workers typically receive per-job pay; employees tend to get hourly or weekly pay.) Are expenses reimbursed, and are supplies and tools also paid for by the company? Independent contractors, by definition, provide their own supplies, experts say, much as a plumber arrives for a job with his own tools.
Behavioral control. Does the company have control over how the worker operates? This includes, but is not limited to, whether the person is required to work full time or on the premises.
Nature of the relationship. Is training provided by the company? That’s a red flag that suggests “employee.” Are benefits offered? Is the person expected to not have other employment? Does the work performed involve a key aspect of the business? If you answer “yes,” odds are the worker will be classified as an employee.
To read more about employment in the gig economy, read Gig Workers Challenge Old Order.