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Uber Hit With $650M in Employment Taxes in NJ

Uber claims that its drivers are independent contractors.  New Jersey, on the other hand, says that they are employees.  What’s the difference?  At least $650 million in unpaid unemployment and state disability taxes, according to New Jersey.

This tax bill should remind you that there are serious penalties for misclassifying employees as independent contractors.  In addition to NJ, the federal and most state governments are becoming more aggressive in examining these independent contractor relationships for a variety of reasons.  First, independent contractors are themselves less likely to pay income taxes, so the government prefers that taxes be withheld as they are for payroll employees.  Second, independent contractors are not paid overtime, which is required for most employees.  Third, most of the labor and employment laws do not apply to independent contractors, which makes them an attractive option for employers sick of the National Labor Relations Act, the Civil Rights Act, the ADA, the Fair Labor Standards Act, worker’s compensation laws, and unemployment insurance claims.

Many small businesses are drawn to the use of independent contractors for these reasons, and the government knows it.  Some businesses just pay these individuals lump sums, sometimes in cash, for their work and leave no paper trail.  Others put together elaborate “independent contractor agreements” that use all the right legal words, but really are just an attempt to disguise an employee as a non-employee.

Those legal words may be familiar to you.  With employees, the company “controls the manner and means” by which they accomplish their tasks.  With independent contractors, the contractor controls the manner and means, the dates and times on which it will do the work, the individuals who will do the work, and whether he works for other companies doing the same thing.  The more control the company exerts over the independent contractor, the more he becomes to look like an employee.

Most independent contractors are easy to identify.  The person sent by an independent repair company to fix equipment is an independent contractor; a person kept around all the time to fix equipment — like an in house mechanic — is not.  The cleaning company that empties the trash each night and cleans the bathrooms is an independent contractor; an employee who stays after hours each night to do these tasks is not.

If the Department of Labor decides that your independent contractor relationships are shams, it can order you to pay minimum wage and overtime, and it can cite you for not keeping wage and hour records.  The IRS, on the other hand, can treat the money you have paid contractors as “net wages,” and force you to pay in what should have been withheld in taxes.  The IRS does this by determining what the “gross” would have been based on the net, which causes the company to pay even more for the independent contractor than it would for a pure employee.

Some states, like Maryland for example, have started assessing penalties for improper classification, though not yet in all businesses.  Construction, where the practice is rampant, has been targeted.  More of these laws will be enacted in an attempt to generate more revenue for state treasuries, like New Jersey’s.

These relationships can be time bombs waiting to explode on the unsuspecting business.  If there is a dispute between a business and a contractor, that contractor may go to the Department of Labor seeking overtime as an employee.  An employee disgruntled for any reason can complain to the IRS or the Department of Labor about independent contractor relationships in the business.  Most of these complaints can be made anonymously.

Sometimes, an independent contractor gets hurt on the job and files a workers’ compensation claim.  This is one of the most common ways the issue of employee status comes up.

Businesses should examine each independent contractor relationship to confirm that the relationship can pass scrutiny if challenged.  Unfortunately, the courts say that a balancing test should be used, examining a variety of factors to determine independent contractor status.  That leaves too much discretion and interpretation.  Companies should start with a presumption of employee status and only change that determination after overwhelming evidence of independence.  Generally, if you have to ask whether an individual is an independent contractor, she probably is not.  If it looks and quacks like a duck, it’s probably a duck.

Finally, if you use an employee, after hours, to perform tasks that are normally done by independent contractors (like painting), the government takes the position that they are still employees.  You can pay a different rate of pay, and you can use that rate of pay to determine overtime, but you cannot pay them a lump sum without withholding taxes and otherwise reporting the amount as wages.

If you have independent contractors, look long and hard at the relationship.  If it quacks, look longer and harder.


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