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Guard against misclassifying independent contractors

Misclassifying workers as independent contractors can cause bigger headaches than it’s ever worth.

Employers found to have misclassified employees as contractors face a number of consequences:

  • Unpaid overtime.
  • Unpaid taxes.
  • Un-provided benefits.
  • A discrimination claim, or claims under other laws that protect employees but not contractors (i.e., the Family and Medical Leave Act).

A recent ruling by the 6th Circuit Court of Appeal can help employers to spot the difference between independends and what would be considered a full-time employee.

The issue in Troyer vs. T.John.E. Productions Inc. was whether the company failed to pay overtime to three individuals who performed road crew services (setting up and breaking down displays) at the company’s collegiate and corporate events. The court determined that the company had mis-classified them, and owed them unpaid overtime as employees:

Here’s what the court said:

Plaintiffs testified that their working relationship with Defendants was relatively permanent, they worked hundreds of hours of uncompensated overtime over several months, and that Defendants exercised strict control over their schedule and day-to-day activities while out on the road. Defendants countered that Plaintiffs worked on a job-by-job, independent contractor basis, that the Plaintiffs had a great amount of autonomy regarding how they completed their work.

In determining whether an worker is an employee or an independent contractor, the IRS ompares the degree of control exerted by the company to the degree of independence retained by the individual. Generally, the IRS examines this relationship in three ways:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

If you are considering classifying someone performing services for you as an independent contractor, your answers to these three questions will determine whether that individual is a bona fide contractor, or instead, is a employee.

When in doubt, best to be cautious. The government applies these tests aggressively to find employee-status whenever it can. You should too, and the risks are too high to make a mistake.

About the Author


Larry Hannappel

Larry spent 16 years with Century Casino’s and was instrumental in the start-up and growth of the company through expansions in Canada, South Africa, the Czech Republic, Poland and on several cruise ships as well as in Colorado. He was most recently the SVP, Principal Finance Officer and COO of North American operations for Century Casinos Inc., a multinational, Nasdaq-traded gaming company. Earlier in his career, Larry worked at the Johns Manville Corp. Larry spent 13 years in various accounting and finance functions in the company’s fiberglass manufacturing division and was key in the start-up of a molding plant in Indiana. Larry and his wife Kathy and three children live in Colorado. He enjoys four-wheeling, motorcycling, golfing, skiing and brewing beer.

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