It’s no secret that the gig economy is booming, and with it comes a growing number of independent contractors – or are they independent contractors? How does the IRS determine who is an employee and who is an independent contractor? And why should talent marketplaces and platforms pay attention to this distinction? In this article, we’ll take a look at what the IRS considers when determining worker classification and why platforms need to pay attention to these criteria.
What Does the IRS Consider When Determining Worker Classification
When it comes to determining worker classification, according to their own Worker Classification 101, the IRS looks at three primary factors:
- Behavioral Control – Does the company have control over the worker’s actions and methods of performing their job?
- Financial Control – Does the employer manage the financial and business aspects of the worker’s job, such as payment, reimbursements, supply of tools and equipment, among others?
- Relationship of the Parties – Do you have written contracts and employee benefits such as a pension plan, insurance, and vacation pay? Also, will the work done be crucial to the business and will the relationship continue?
The IRS is concerned about worker classification primarily for tax-related reasons. You can learn more here about why the IRS cares about worker classification.
Take note that the complexities around rulings expand greatly when you consider that the IRS isn’t the only one with factors for determining worker classification. A worker can be classified as an independent contractor according to one worker classification rule and as an employee according to another, due to differing rules among the IRS, DOL, and states. Check out this article to help you learn how to determine if a worker is an employee or independent contractor.
The Consequences for Misclassification of Workers
The consequences of misclassifying workers can be serious. Not only can it result in expensive financial penalties, but it can also damage a company’s reputation and lead to legal action. The potential penalties for misclassification can include paying lost Social Security and Medicare taxes as well as heavy fines and penalties. Additionally, if an employee is misclassified as an independent contractor, they may be denied benefits they are entitled to receive.
To avoid expensive consequences, it’s crucial for employers to accurately classify their workers. This will help them adhere to labor laws and establish an equitable workplace for their staff.
Recent Lawsuits Targeting Platforms & More for Worker Misclassification
Most recently, grocery delivery platform Instacart is paying $46.5 million in restitution to misclassified California workers over a case from four years ago. In a case from last year, the Rover Group will pay $18 million in a worker misclassification settlement. In response to an audit in New Jersey that found Uber had misclassified its drivers as independent contractors, the ride-hailing company agreed to pay $100 million last year.
Platforms aren’t the only companies having action taken to penalize worker misclassification. It’s becoming such a hot topic that even Nike’s workforce management practices have come into question. The Guardian writes: “Nike may have misclassified thousands of temporary office workers and faces potential tax fines of more than $530m.”
Tips for Platforms to Stay Compliant with Regulations Regarding Worker Classification
Implementing strategies to ensure compliance is essential for companies in today’s quickly-evolving world where complying with regulations is not an easy task. We recommend creating a compliance team that stays updated with changes. Regular internal audits should also be done to spot possible issues and address them before they escalate. Another possible way to avoid penalties and stay within the law is establishing a culture of compliance. This involves ensuring employees understand the significance of adhering to regulations. By implementing proactive measures, companies can mitigate potential legal risks.
If you find worker classification compliance complex and overwhelming, you can use GreenLight.ai like other leading brands and talent marketplaces to manage compliance challenges. We’re the global payroll platform with the world’s first AI-driven worker classification engine. If you have questions or concerns about your program, or just want a risk assessment, get in touch with our experts by scheduling a demo here.