Growing Number Of Startups Misclassifying Independent Contractors

Today’s world of work looks very different from that of even a decade ago. Many businesses and employers offer workers more flexibility with regard to working offsite or remotely. Additionally, workers may have more say in and control over when and how they work. A growing number of workers today are also legally designated as independent contractors.

From a business perspective, hiring an independent contractor as opposed to an employee can be a tremendous cost saving. Under IRS guidelines, for every employee an employer is required to withhold and pay taxes related to Medicare, Social Security, income and unemployment. Additionally, employees often demand higher salaries and benefits including health care insurance. However, for an independent contractor, taxes are paid by the contractor.

The tremendous cost advantages of designating workers as independent contractors versus employees is attractive to many businesses. What isn’t attractive to many businesses are the stipulations and rules that apply to independent contractors.

For example, a business that hires independent contractors cannot control how that individual performs his or her assigned job. However, a growing number of startup businesses appear to be ignoring the significant distinctions between an employee and an independent contractor. The misclassification of independent contractors who are really employees has lead to several lawsuits in California’s Silicon Valley.

Known as the technology hub of the U.S. and perhaps the world, in recent years several startup service businesses have cropped up in the region. For these businesses, delivering a high-quality and consistent product and strong branding are key to their survival and success. Many, however, hire independent contractors, over whom they legally have virtually no control, to complete jobs.

Despite IRS rules related to independent contractors, several of these startups continue to train employees on how to perform assigned work duties. From the clothing they wear, to how they interact with customers, to what they charge for their services; businesses are misclassifying employees as independent contractors. This means that not only are these businesses evading paying the IRS, but also employees the benefits they legally deserve like “overtime pay and business expenses.”

Source: Forbes, “Contractor or Employee? Silicon Valley’s Branding Dilemma,” Ellen Huet, Nov. 18, 2014, “Independent Contractor (Self-Employed) or Employee,” 2014

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