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A business needs a workforce. Some business owners are tempted to classify workers as “independent contractors” to avoid the additional costs associated with workers compensation insurance and payroll tax.   However, classifying workers as “independent contractors” indiscriminately has unanticipated costs of misclassification.  As a result, a business owner may end up incurring government fines, additional taxes, penalties and legal defense costs, as a result of a random government audit, or employee complaint. 

Misclassification of employees and independent contractors is complex area of law that is often misunderstood.   Misclassification occurs when a worker is incorrectly classified as an “independent contractor” or “1099”, rather than an employee. Misclassifying employees could run big liability risks for the business, including personal liability to the owner of the business. The risks for these liabilities can be a result of a random government audit, or an independent contractor who files a workers compensation claim as a result of an injury, or dispute with the independent contractor over payment, which leads to a lawsuit. 

Determining a worker’s status can be complex because there are a number of different agencies, such as the Connecticut Department of Labor, the Connecticut Department of Revenue and The Workers Compensation Commission that look into the same issue.  Each of these agencies use a slightly different test to determine whether a worker is an employee or an independent contractor. 

For instance, Ct Department of Labor regularly conducts random audits of employers.  uses the “ABC” test to determine if a worker is an employee or independent contractor.  Under the “ABC” test, whether a worker should be classified as an employee vs. an independent contractor depends on whether (A) the worker is free from direction and control of the hiring business; (B)  the work is being performed outside of the business location and (C) the worker is customarily engaged in a different business and already has a trade or business independent of the hiring business.  However, “an individual who forms a business in response to an offer of work as an independent contractor will not meet the “customarily engaged” or “independently established criteria”

On the other hand, the workers compensation commission regulates payment of benefits to injured employees.  An worker who had been paid as an “independent contractor” who has been injured may attempt to collect workers compensation benefits setting off a lawsuit against the business.  The determination of whether a worker was an independent contractor or an employee entitled to receive workers compensation benefits involves a hearing in the workers compensation claim.   Misclassification creates the risk loss of coverage and fines and penalties. The Department of Revenue and IRS is another agency uses yet another test to focus on a different aspect of misclassification. 

If your business is being audited and you are not clear about misclassification, contact us.

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