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You Say 'Employee,' They Say 'Contractor'

Mar 10, 2016
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In some places, they're called 1099'ers, after the tax form on which their income is reported: People who do work for a corporation but are classified as independent contractors. Companies don't have to pay the employer share of Social Security taxes for contract employees — the employees pay both the employer's and employee's share of those taxes through the "self-employment tax." Contractors also are denied workers' compensation and the right to unionize.

Disputes over such classifications are increasing both in high-profile parts of the economy (some Uber drivers have petitioned the National Labor Relations Board to be declared employees) and more mundane sectors (construction, housecleaning, trucking). A report this month from the Economic Policy Institute suggests that between 10 and 20 percent of employers misclassify at least one employee as a contractor.

Undergraduates and graduate students with summer jobs are one group that often gets wrongly categorized, says Samuel Handwerger, a full-time lecturer in the Smith School's accounting department. One or two students a semester will appeal to him for help, after they come to suspect — thanks to their course work in taxation and a surprisingly high tax bill — that they were really employees, not contractors. There's no hard-and-fast rule that determines which category a worker falls into. "Courts consider the facts and circumstances of each case," Handwerger says. "One thing they will weigh is how much control the company asserted over the worker." If your employer expected you to keep the same hours each day, and gave you a desk, and assumed you wouldn't work for anyone else  — well, those are the kinds of things that can tip the balance toward employee status.

Companies may see aggressively categorizing workers as contractors as a money-saving move, but it's a risky one, since the IRS can assess costly penalties and interest on the taxes that should have been paid. What’s more, Handwerger says, taxpayers can put the IRS on notice about alleged abuses by companies so they can avoid paying "extra" payroll taxes. The forms the IRS provides for this purpose are easy to use and basically send this message to the IRS: audit this company. 

The National Labor Relations Board, or NLRB, has been aggressive about policing companies that rely on contract employees, drawing complaints from business interests that think the board has become too activist, applying rigid rules to an evolving economy. Being a contract worker can provide workers with desirable flexibility in some cases, they say. That's certainly Uber's argument.

But the degree to which employees push the limits is shown by a case involving Super Maid, a cleaning company based in Romeoville, Illinois. Super Maid, according to The Chicago Tribune, treated its maids as independent contractor and paid them a flat rate per house cleaned, regardless of how long it took. The U.S. Department of Labor "sued … arguing the maids were not independent contractors because Super Maid set schedules, assigned clients and required noncompete agreements, which meant the maids couldn't clean houses on their own time," the Tribune reported. "Moreover, the company installed GPS to track workers' movements."

A U.S. District Judge said that the record "more than adequately" showed that the company exerted "significant control" over how the maids to their work, and ordered Super Maid to pay back taxes.

The NLRB has expanded its definition of "control" recently to include control that companies claim they can assert over workers even if they don't use it. They may assert that control in a written agreement, or in statements by managers. Businesses have also pushed back against that change, calling it vague and overbroad.

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The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty master's, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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