We all know that misclassifying employees as independent contractors can result in huge monetary penalties for the employer. You might not have known, however, that such practices can also lead to criminal convictions.
According to recent reports, the owners of a local drywall company were convicted of theft by swindle for mischaracterizing their employees as independent contractors and pocketing over $300,000 of unpaid workers compensation premiums in just one year. They now must serve six months of house arrest, perform community service, pay $30,000 in fines and repay over $300,000 to their insurance provider. Charges of insurance fraud appear to have been dropped under a plea agreement that allowed the company owners to avoid jail time.
The conviction and sentencing in this case brought cheers from representatives of the building trades, who noted that practices like this create unfair competition for jobs between those who follow their legal obligations and those who do not.
It is what it is
It bears repeating that whether a worker is an employee or independent contractor is not typically determined just by what the employer wants or what the parties agree to. This is a legal determination made according to the multi-factor tests that the courts and government agencies use to resolve these questions. While the tests might vary a bit, they generally revolve around the question of who controls the conditions under which the job will be performed (e.g. who sets the schedule, who pays for the materials, is the worker paid hourly or by a set job price, etc.).
Recently, some courts have espoused what is called the “Economic Realities Test” that culls down the multi-factor approaches to two essential factors:
- The nature and degree of the employer’s control over the work; and
- The worker’s opportunity for profit or loss based on personal initiative or investment.
The Department of Labor recently suggested that they would utilize this test as well, although the results of the recent presidential election may scuttle this proposal before it even gets off the ground.
Regardless of the test that is utilized, it is clear that what the parties want plays a relatively small role in determining how the worker is to be classified. Thus, as with the drywall company mentioned above, huge trouble awaits the employer who decides that workers are independent contractors even though the facts and the law say otherwise.
Misclassifying workers as independent contractors rather than employees, even if done without wrongful intent, can have a dramatic economic impact on the employer in a variety of ways, including:
– Employers could be on the hook for unpaid minimum wage and/or overtime to such workers. This could result in substantial back pay owing to employees if the employer erroneously misclassifies a particular job classification held by a large number of employees;
– Employers may be liable to misclassified workers for the value of benefit plan contributions that should have been made had the workers been properly classified as employees;
– Workers could sue for the costs that they incurred when they were sick or injured and were not able to utilize the employer’s group health insurance plan that would have covered them but for the misclassification.
– IRS penalties may be assessed for failure to withhold taxes properly from payments to workers.
If it can be determined that the hiring entity purposefully misclassified the workers in order to avoid paying insurance carriers and/or deprive workers of coverage to which they are entitled, it seems that criminal prosecution for theft by swindle, insurance fraud and other similar crimes may now be waiting in the wings.
Intentionality may very well be a key to whether criminal prosecution might arise from misclassification. Indeed, the criminal complaint in the case of the drywall company asserted that one of the owners “stated that he was aware that workers at construction sites have been injured and been told not to file claims.” As such, their wrongful intent to profit from misclassification seems to have played a key role here.
Still, the possibility of such prosecution, combined with the stiff monetary disincentive, should be enough to persuade any reasonable employer to check with knowledgeable legal counsel before making a questionable classification decision.