Do you use independent contractors? If so, be aware of the cost if they are misclassified and determined to be employees.

In November, an Ohio federal judge ruled a cable/telecom installer’s 250 workers were employees, not independent contractors.

The U.S. Department of Labor (DOL) issued a $1.6 million claim against the company for wages and damages. This follows prior year cases of Federal Express, which owed $319 million in back wages, and a $97 million judgment against Microsoft.

A Watchful Eye

Misclassification is a top priority for DOL, the U.S. Department of Revenue and their state counterparts. In 2011, DOL collected more than $5 million in back wages for more than 7,800 misclassified workers. In 2011, Missouri assessed $1 million against more than 1,000 employers who misclassified nearly 7,000 workers. State and federal labor departments offer training and assistance for employers wanting to do the right thing. And in October, the IRS announced its Voluntary Classification Settlement Program, a kind of amnesty for employers that have unknowingly violated the rules.

Know the Rules

So what should an employer do to ensure workers are properly classified? IRS uses three major factors to determine proper classification:

Behavioral Control // Who directs and controls the work?

Financial Control // How is the worker paid, for whom else do they perform work?

Relationship Between the Parties // Is there a contract, how permanent is the relationship?

States have their own criteria for determining whether a worker is an independent contractor or an employee. Missouri uses a 20-factor test (http://bit.ly/IndepContractorMo), and Kansas looks at a number of factors, as well (http://bit.ly/IndepContractorKS).

Document the Relationship

Lastly, if you use independent contractors, always have a signed contract. Ask for documentation, such as W-9 forms, secretary of state registration, business structure, business and website addresses, phone, insurance certificates, unemployment insurance and employer ID numbers, licenses, references, marketing materials, business cards, stationery and invoice forms to demonstrate the contractor operates   independently.

Do not be afraid to ask state or federal agencies for help. Prevention is your best ally to avoid unknowingly misclassifying your workers, being found in violation, then paying the price.

Colleen White is president of Strategic Workplace Solutions, which specializes in labor law compliance training and consulting. She also is a former director of the Missouri Division of Labor Standards. (816) 322-7808 // This e-mail address is being protected from spambots. You need JavaScript enabled to view it // www.swsinfo.com