Beware of Recruiting Agencies
Misclassifying YOU as an Independent Contractor
If your “employer” is currently paying you as a 1099 independent contractor, you need to be aware of this. It can be bad news for you…and worse news for your employer!
“Employee Misclassification” is a term that you’re likely going to hear more and more about in the coming months and years.
Employee Misclassification is a term describing the practice of labeling workers as independent contractors rather than employees. By labeling workers as independent contractors, business owners avoid paying Social Security and Medicare taxes, federal/state unemployment premiums and workers compensation insurance (among many other costs).
The problem is misclassifying workers as independent contractors when they are in fact employees is illegal, and it’s costing government agencies billions each year. It’s also pushes expenses, liability and costs onto the worker.
Consider this analogy: If you put a sign on a horse that says “Cow”, is the animal a horse or a cow? The obvious (and accurate) answer is it’s still a horse.
Similarly, if a recruiter is only working for one company, they are utilizing that company name, they are being paid by that company, they are using that company’s forms, computer programs, etc., this is obviously an employee/employer relationship.
Many recruiting agencies have attempted to label their workers as “independent contractors” when in fact they simply don’t meet the legal threshold for actually being independent contractors. You can call the relationship whatever you want, but “if it walks like a duck and quacks like a duck, it’s probably a duck”.
Workers who are being classified as independent contractors often have little knowledge on the repercussions and responsibilities of being considered self-employed.
They may be unaware of the additional legal liability they have incurred.
They also may be surprised when they receive their year-end tax bill that includes a self-employment tax of 15.3% (12.4% for Social Security plus 2.9% for Medicare).
Also surprising to many is the inability to file for federal/state unemployment benefits.
Both federal and state governments have decided to take action to put a stop to this activity.
There is a coordinated effort on the part of several government agencies to clamp down on employee misclassification. The U.S. Department of Labor and the IRS have a Memorandum of Understanding that is being spread to state overnments. Over half of all states have been already signed on for the battle against worker misclassification. If one agency finds evidence of worker misclassification, they will now pass that information on to other agencies. It becomes a very expensive mistake.
According to the IRS, some of the penalties include being subjected to as much as 41.5% of the workers wages going back 3 years. If the IRS thinks you intentionally misclassified workers, they can seek a criminal conviction which include jail time.
Other penalties for violators include being labeled as a “tax evader” and being audited and forced to repay any business deductions you took during that time you were misclassified.
On a state level, many states that have enacted new laws that make the penalties even stronger. For example California “AB5” takes effect on January 1, 2020.
Do your own research and make yourself aware of these practices.
We’ve included numerous links below that should be helpful.
U.S. Department of Labor:
National Conference of State Legislatures:
And of course, lawyers are jumping on the bandwagon, too:
Other articles about the issue: