Update: The IRS has announced a new program to allow employers to voluntarily re-classify workers as employees instead of independent contractors. Read more about the Voluntary Classification Settlement Program, but be aware of other potential issues that may arise, like this one. Before you decide to enroll in the IRS reclassification program, discuss it with your employment attorney.
A recent case heard in District Court in New Jersey points out another issue with mis-classifying workers:
Two women were hired and, because they wanted to work at home, were classified as independent contractors. This arrangement continued for many years (10 years in one case), with the women repeatedly asking to be classified as employees. Finally, the workers submitted a classification review request (Form SS-8) to the IRS, who determined that they should be classified as employees and that the company must pay back employment taxes (FICA taxes) on these workers.
After they were hired as employees, the two women sued the company, claiming they should have received benefits during the time they worked as independent contractors, since they should have been classified as employees and further claiming they were intentionally mis-classified to avoid paying them benefits.
The Court ruled, in part, that the language of the benefit plan specifically excludes mis-classified employees from receiving benefits. That is, the plan anticipated that an independent contractor (specifically excluded from the benefit plans) might be found to have been mis-classified and specifically excludes these workers from receiving benefits during the time when they were mis-classified.
This case illustrates the principle of clear, unambiguous contract language, written by a competent attorney, which foresees issues and deals with them specifically. While the employer did have to pay back employment taxes, it was spared the requirement to pay benefits for the many years these women worked as independent contractors because the company had the foresight to deal with this issue in the document language.
More on independent contractors
IRS Factors in Classification of Employees vs. Independent Contractors
10 Facts You Should Know about Independent Contractors
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Source: Kalksma et al. v. Konica Minolta Business Solutions U.S.A., Inc.