Business owners in Alabama, as well as anywhere else, are usually under pressure to reduce costs and maximize profits. Am I an employee or an independent contractor? Unfortunately, some employers choose to decrease expenses by inappropriately classifying their employees as independent contractors or salaried employees.
As far as an employer is concerned, an independent contractor is a significant cost savings for the company as they don't need to withhold income taxes from a third-party contractor. Therefore, the employer is not required to pay federal unemployment taxes or FICA (Social Security and Medicare). Furthermore, they also do not need to pay towards state contributions to workers' comp funds and unemployment insurance.
The above employer benefits prompt some companies to classify individuals who work for them as independent contractors rather than employees. But this type of misclassification is usually not beneficial for an employee.
Independent contractors, by definition, are self-employed. Labor, employment, or related tax laws do not cover independent contractors. If you are misclassified as an independent contractor, you will not have access to some protections and benefits, such as overtime, unemployment insurance, minimum wage, Family and Medical Leave, and other benefits given by that specific employer to its employees.
Employee vs. Independent Contractor Status
To determine whether you should be given employee or independent contractor status, you can ask yourself the following questions:
- Am I compensated on a per-project basis?
- Does the employer determine my hours?
- Does my employer supply the tools and materials that I need for my job?
- Does my employer supervise me on projects assigned to me, or do I complete the job autonomously?
The “Right-to-Control Test”
These questions are vital for clarity on your status. For instance, the IRS uses what is called the “right-to-control test.” In this method, the level of control that the employer has over the manner an individual's work is performed is analyzed.
The worker will be considered an employee if the employer exercises significant control. In the last few years, the IRS has come down hard on misclassification of employees as it causes billions of dollars to be lost in tax revenue annually.
To determine whether independent contractor status is applicable, there are various tests or analyses that are used. In 1996, a group called the Commission on the Future of Worker-Management Relations advised that a straightforward and standardized definition of employee should be applied to labor, tax, and employment laws to mitigate the abuse and confusion of employee misclassification by employers.
For simplification purposes, the commission recommended the use of a standard based on the “economic realities test.”
The “Economic Realities Test”
The “economic realities test” is believed to make it more challenging for employers to categorize a worker as an independent contractor. Besides considering the level of control the employer exerts over the worker and his work, it also determines how much the worker is financially dependent on the enterprise.
In addition, this method helps determine the employment status of a worker for the purposes of the Fair Labor Standards Act, Family and Medical Leave Act, and other federal employment laws.
However, the definition is not yet established in a concise or uniform manner. Therefore, if you feel that you may have experienced intentional or unintentional misclassification, it is best to consult a qualified employment law attorney.
Following Federal or State Laws
There is quite a bit of confusion between employers and workers. Lawsuits are emerging all over the nation. According to the IRS, the enterprise should assess their complete relationship and document various common law factors that establish evidence of the level of control and independence.
Am I an Employee or an Independent Contractor?
When there is a conflict between federal and state laws, it can be confusing. Employers are left wondering which rules to follow. Generally, employers should follow whichever law is most beneficial to the worker. For this reason, the default status of a worker under federal and state laws is that of an employee. The employer has the burden of proof to establish the worker's independent contractor status.
But the scope of state laws may be limited. For instance, in certain states, this test is only used for unemployment compensation. Either federal or state regulators can audit or review companies.
Has Your Employment Status Been Misclassified? Speak with a Seasoned Employment Law Attorney
If you believe that you should be classified as an employee but the company you work for has you misclassified as an independent contractor, there is legal relief available, which may include compensation that you are owed as well as other damages. For help with any type of employment law issue in Alabama, contact attorney Kira Fonteneau for a free consultation. Message us online or call our office today at (404) 383-5720. We look forward to serving you!