When you hire someone to work for your company, you must classify them. You have to decide whether you want to pay them a salary or on an hourly basis. You also have to determine if you want them to work full-time or part-time.
Some companies will choose to bring on workers as independent contractors. Instead of having them fill out a W-2, they must execute a 1099. If your company employs independent contractors, you could eventually find yourself facing allegations from those individuals that you violated their rights by misclassifying them.
When might members of your staff bring such allegations against your business?
After an injury on the job
Hiring independent contractors instead of employees means that you won’t have to pay for workers’ compensation insurance coverage for those contracted workers. Those workers may not understand the implications of their classification until they get hurt on the job. Then, when they apply for workers’ compensation benefits, they don’t get approved. A worker might try to claim misclassification so that they qualify for workers’ compensation benefits after an initial denial.
After they run into tax issues
Independent contractors have to pay their own employment taxes. Not only do they have a higher overall tax rate than employees because your company doesn’t pay any employment taxes on their behalf, but they also have to make quarterly tax payments. If a worker finds themselves facing some kind of tax controversy because they failed to meet their tax obligations as an independent contractor, they might allege misclassification as a defense. Unfortunately, that means your company could then face scrutiny about the underpayment of taxes.
After you terminate their employment
Independent contractors, unlike employees, tend to only work for the duration of specific projects at a company. They might expect to stay with the business indefinitely and react poorly to the termination of their contract. You will not have made unemployment payments on their behalf, so they will not be able to claim unemployment after they no longer work for your company. That might motivate them to claim misclassification as well.
Having good documentation about how you engage with independent contractors can help you defend your company if workers allege that you intentionally misclassified them.