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Classifications: Employee or Independent Contractor?

A common question that business owners raise involves the use of the terms “employees” versus “independent contractors.” The use and classification of an individual as an “employee” or “independent contractor” can be one of the more complicated employment law questions facing business owners. The classification has significant legal and financial implications for business owners.

When an employer classes a worker as an “employee,” the employer must withhold income taxes, pay one-half of FICA taxes, federal and state unemployment taxes, maintain worker’s compensation insurance, and make numerous filings each year.

However, an “independent contractor” is responsible for their own tax obligations, and self-directs their work. Business owners must report payments to an independent contractor via a 1099. Several governmental agencies including the IRS, Department of Labor, the Unemployment Insurance Agency, and the Department of Treasury may share information with each other regarding “employee” vs. “independent contractor” status.

Under Michigan law, independent contractors are not protected under the Elliott Larsen Civil Rights Act or the Michigan Whistleblower Protection Act.

In 2015, the Department of Labor reacted to a number of complaints by workers claiming that they have been misclassified. These misclassification claims are tedious, expensive, and fact specific. Furthermore, there are varying standards regarding whether a worker is an “employee” or an “independent contractor” based on the type of claim asserted by the worker. One test, the “Economic Reality Test,” is used for determining employment status when it comes to social legislation such as worker’s disability compensation. However, another test, the “Control Test,” is used in tort actions. Both of these tests have multi-faceted factors that need to be considered under specific circumstances.

Significant legal problems may arise when an employer incorrectly labels an individual’s employment status as “independent contractor” when they are in fact an “employee” under the applicable law. To avoid this problem, consult with an experienced employment attorney regarding the distinction between “employees” and “independent contractors.” Be sure to have a defensible independent contractor agreement that accurately reflects the relationship between the contractor and business.

If you have questions regarding the classification of one of your employees, please contact Nancy Chinonis, (810)232-3141, employment attorney at Cline, Cline & Griffin, P.C.

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