By Wayne Jordan
A vintage furniture dealer I’m aware of is on a “slippery slope” that may land him in jail. His transgressions? There are several, but the most serious is designating employees as independent contractors that should be classified as employees.
In their search for more revenue, federal and state governments are cracking down on business owners who mis-classify employees, as well as independent contractors who don’t claim all their income. And the penalties for doing so can be serious.
In a 2014 interview, attorney Jeffrey Davine, a partner with Mitchell Silberberg & Knupp LLP, told the website Law360: “If a business misclassifies a worker and the government ultimately finds they should have been an employee, in theory, the business is responsible for paying all taxes they should have withheld, plus the misclassified employee’s share, plus interest and penalties … If you multiply that by several employees and several years, the business could be looking at a devastating tax liability.” [http://bit.ly/1FwhmH7]
In the same article, Michael Fried, a partner with Fried & Rosefelt LLC, states:
“More recently I’ve seen common, everyday problems turn into criminal prosecutions, as opposed to staying in just the civil arena … In the past you had to really work hard to get criminally prosecuted for failure to pay employment withholding taxes.”
Not any more, apparently.
In New York, the recently enacted Fair Play Act counts each mis-classification as a separate offense. Two warnings are given, but on the third offense an officer of the company can go to jail for 30 days for each offense. Fifteen other states have joined New York in a joint partnership with the US Department of Labor to coordinate mis-classification efforts. The information-sharing between states and the DOL means that even simple matters like an unemployment claim by an independent contractor can trigger an audit.
The vintage furniture dealer I mentioned above started down his “slippery slope” innocently enough. His repurposed furniture sold well in a local antique booth, so he rented warehouse space to paint more furniture. When he couldn’t keep up with the demand, he hired a woman to paint and re-style furniture for him. She was paid “under the table” and by the hour. Soon, customers were coming to his warehouse location to buy furniture. Since he was often away picking new merchandise, he hired another helper to set up retail displays in his warehouse and wait on customers. Within a year, he had four retail employees and two full-time furniture painters. Everyone was paid “under the table” each week in cash.
Most antique dealers are not foolish enough to travel down this path. But it’s not unusual for dealers to pay “under the table” for the following services:
• eBay or other listing help
• delivery help
• website/webstore maintenance
• estate sale help
• antique show help
• auction help.
If you pay any of the above by the hour, they are employees, not independent contractors. It makes no difference that you may have a verbal agreement with them, or even a written agreement. If you control the means by which their work is accomplished, then they are your employee.
For example, if you tell your estate sale, auction or antique show helpers that they need to be at work at 8 a.m. and stay until 6 p.m., and you will pay them $xx per hour, then they don’t qualify as contractors. If you tell the person who cleans your store that they need to be there on Monday and Thursday nights from 7 to 9 and you supply all their cleaning supplies and tell them what you want them to do, then they are employees, not contractors. Same for the “computer” folks: If they come to your facility, use your equipment, do what you tell them to do and get paid by the hour, then they are employees.
A key element in all of the above is whether the activity is “regular and recurring.” If you ask your delivery guys to show up every Tuesday and Saturday to make deliveries, then they are employees. But, if you call someone occasionally to help set up a show or make a delivery, then what you have is a “day laborer” and it’s OK to pay them in cash. But get a receipt!
What you can’t do is tell an independent contractor (IC) when to arrive at work and how long they have to stay. You can’t supply tools and supplies to an IC; they have to supply their own. All you can do with an IC is tell them what “the job” is, define the standard of performance and the deadline for getting it done. All you can do is say “yea” or “nay” to the results. When they do the job is entirely up to them.
Some of the questions that the IRS asks when determining if an individual qualifies as an IC are:
• Are they paid by the job?
• Do they do this type of work for more than one company?
• Do they set their own working hours?
• Do they furnish their own tools and materials?
• Are they at risk of a loss?
• Is there a “tradition” of independent contracting for this type of work (i.e., piano teacher, web designer, content writer)?
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But if any of the following apply to your situation, then the IRS will most likely rule that the individual(s) in question are employees, rather than ICs:
• Paid by the hour
• Can be fired at any time
• Receives training from the company
• Uses company facilities and/or equipment
• Works exclusively for the company
• Has the right to quit without incurring liability
• Provides services that are a regular part of the company’s day-to-day business.
Slippery slopes (“a process or series of events that is hard to stop once it has begun that often leads to unintended consequences”) are common with businesses of all sizes, but more common in small business. The infamous Bernie Madoff explained his “slippery slope” in a 2009 Vanity Fair article: “Well, you know what happens is, it starts out with you taking a little bit, maybe a few hundred, a few thousand. You get comfortable with that, and before you know it, it snowballs into something big.” [http://vnty.fr/1EYeeCj]
If you think you might be going down a slippery slope, consult an attorney to discuss your options. If you need more information to evaluate your position, study the links on the webpage “Using Independent Contractors and Freelancers” on the law website Nolo.com: http://bit.ly/1FWhjqq.