Mis­clas­si­fied as an in­de­pen­dent con­trac­tor: When can you be con­sid­ered to be self-employed?

Many employees would love to be their own bosses. After all, it is a tempting prospect to manage one’s own working hours and no longer be dependent on the boss’s in­struc­tions. The feeling of working directly for yourself also makes it at­trac­tive to switch to self-em­ploy­ment. Some, on the other hand, do not opt for self-em­ploy­ment entirely vol­un­tar­i­ly, but see it as the only way to get work.

In any case, both groups run the risk of being classed as falsely self-employed. Employers save on social security con­tri­bu­tions and are not bound by labor laws if they employ free­lancers. If they make use of these ad­van­ta­geous aspects of a working re­la­tion­ship, but otherwise have the essential char­ac­ter­is­tics of dependent em­ploy­ment, the leg­is­la­tor clas­si­fies these employees as falsely self-employed. But what is false self-em­ploy­ment? How can it be rec­og­nized? We answer these questions in the following sections.

False self-em­ploy­ment is not a legal term, but rather comes from col­lo­qui­al language. In short, it is when a con­trac­tor is treated as self-employed but works under con­di­tions similar to those of a permanent employee. This is also known as mis­clas­si­fi­ca­tion of an employee as an in­de­pen­dent con­trac­tor. This can happen ac­ci­den­tal­ly, but it can also be due to ignorance or unfair intent on the part of the employer.

If it turns out that a free con­trac­tu­al re­la­tion­ship between the client and the con­trac­tor is actually in a dependent em­ploy­ment re­la­tion­ship (i.e. essential criteria of false self-em­ploy­ment), then this has legal con­se­quences for both sides – namely …

• For social security
• For labor law
• For taxation

What con­sti­tutes dependent em­ploy­ment under labor and social law, i.e. whether there has been a mis­clas­si­fi­ca­tion of a worker, is generally dealt with in the Fair Labor Standards Act (FLSA) and is the purview of the US De­part­ment of Labor. The FLSA de­ter­mines whether an em­ploy­ment re­la­tion­ship is con­trac­tu­al or based on “economic reality” rather than “technical concepts” and is not based on a master servant re­la­tion­ship. The US supreme court has also had a number of rulings, including the decision that there is no single test for deciding whether a person is self-employed or an employee. Instead, it’s the situation or total activity that dictates the clas­si­fi­ca­tion. Sig­nif­i­cant factors include:

1. How integral the services provided are to the principal’s business
2. Whether the working re­la­tion­ship is permanent
3. The amount the con­trac­tor has invested in fa­cil­i­ties and equipment
4. How much control the principal retains
5. The con­trac­tor’s op­por­tu­ni­ties for profit and loss
6. The degree of in­de­pen­dent business or­ga­ni­za­tion and operation
7. The amount of ini­tia­tive, judgement, or foresight in com­pe­ti­tion with others that the con­trac­tor must achieve to be con­sid­ered suc­cess­ful

If the above mentioned framework con­di­tions apply to an in­di­vid­ual, they are not con­sid­ered to be self-employed or a con­trac­tor, but bound by an em­ploy­ment contract and sub­se­quent­ly, an employee. However, the tolerated degree of this in­de­pen­dence depends on the activity concerned – and only an overall view of all cir­cum­stances should clarify whether an em­ploy­ment contract exists. It is par­tic­u­lar­ly important in this context that the nature and per­for­mance of the work and the de­pen­dence on the client are essential criteria by which the em­ploy­ment re­la­tion­ship is assessed. The existence of a contract for­mu­lat­ed in writing is therefore less important than the actual working con­di­tions for es­tab­lish­ing the mis­clas­si­fi­ca­tion of an employee!

The re­la­tion­ship between an employer and its employees is governed by labor law. This law sets out the employee’s de­pen­dence on the employer in clear rules. In com­par­i­son, in­de­pen­dent con­trac­tors and free­lancers can organize their working re­la­tion­ships much more freely. However, if the in­de­pen­dent con­trac­tor is largely dependent on the client to the same extent as a regular employee, then a mis­clas­si­fi­ca­tion as an in­de­pen­dent con­trac­tor has occurred. According to labor law, if they fulfil the criteria listed in the previous section, then an em­ploy­ment contract actually exists, along with all legal con­se­quences. This could mean concrete vacation re­quire­ments, dismissal pro­tec­tions, wage con­tin­u­a­tion guar­an­tees in case of illness, and many other ad­van­tages for the con­trac­tor, depending on the labor laws in their state.

Whether you are being mis­clas­si­fied as an in­de­pen­dent con­trac­tor under labor law and are entitled to an em­ploy­ment contract may be clarified by bringing a suit to the labor court.

In the US, employees are subject to federal and (sometimes) state taxes which employers are required to pay on behalf of their employees, and which must be paid by in­de­pen­dent con­trac­tors them­selves in annual filings. If you are being led to believe that you are a full employee when you are being mis­clas­si­fied as an in­de­pen­dent con­trac­tor, your employer is not with­hold­ing these taxes from your wages and paying them on your behalf, which means you are not con­tribut­ing to these taxes and may be accused of tax avoidance un­wit­ting­ly.

The­o­ret­i­cal­ly, any self-em­ploy­ment field could have in­di­vid­u­als finding them­selves mis­clas­si­fied as self-employed. However, in certain oc­cu­pa­tion­al groups this ex­ploita­tion occurs more fre­quent­ly. These include:

• Lecturers, pro­fes­sors, and teachers
• Drivers for for­ward­ing agencies and courier services
• Honorary doctors and nursing staff
• Computer pro­gram­mers
• Graphic designers, copy­writ­ers, and other creative pro­fes­sions

What criteria should you pay par­tic­u­lar attention to if you are unsure whether you are a full employee or an in­de­pen­dent con­trac­tor? In principle, there are some typical char­ac­ter­is­tics, even if much depends on the in­di­vid­ual case. You can use the following checklist to see whether you are self-employed and how likely it is that an em­ploy­ment re­la­tion­ship will be clas­si­fied as such. The following char­ac­ter­is­tics highlight that you may be falsely self-employed:

• Activity is carried out on a permanent basis and es­sen­tial­ly for just one customer: more than five sixths of the turnover is from a single customer
• Work is carried out according to in­struc­tions and in­te­grat­ed into the client’s or­ga­ni­za­tion
• Pre­scribed place of work with work equipment provided
• No personal en­tre­pre­neur­ial action – you do not have the ap­pear­ance of your own company with letter paper or business cards
• None of your own employees
• Permanent employees are also employed by the client for the same task
• In­de­pen­dent con­trac­tors with the same tasks have been made permanent employees by the client

The following two examples il­lus­trate to what extent the mis­clas­si­fi­ca­tion as self-employed can differ:

• A self-employed graphic designer receives a new customer. The customer pays better than previous clients do, which is why the designer now handles repeated orders for them. As the client has many orders to place now, the designer works ex­clu­sive­ly for them after a few months. In order to fa­cil­i­tate co­or­di­na­tion with other de­part­ments, the client offers to provide a work­sta­tion in their office, including a computer and software. The graphic designer agrees to be available in the office during regular working hours and follow general in­struc­tions.
• A cleaner wishes to return to their post after taking parental leave, but with more flexible working hours. They are offered a job on a freelance basis, which they accept. The company provides them with all the necessary cleaning materials and in­creas­ing­ly in­te­grates them into the company’s work planning. In order to simplify the process, the employer de­ter­mines in detail when the cleaning work is to be carried out.

Being mis­clas­si­fied as an in­de­pen­dent con­trac­tor has ram­i­fi­ca­tions for your em­ploy­ment status, as well as your social security, Medicare, and federal and/or state tax payments.

Employers are re­spon­si­ble for paying social security, Medicare, and federal and/or state income taxes on behalf of their employees. If an employer mis­clas­si­fies an employee, they are violating wage, tax, and em­ploy­ment el­i­gi­bil­i­ty laws. Doing so can incur fines and/or legal action from the US De­part­ment of Labor (DoL), the Internal Revenue System (IRS), as well as state agencies. Employers are also required to file payroll taxes and may be fined for failing to do so if they are mis­clas­si­fy­ing employees.

Ad­di­tion­al­ly, employers must have I-9 forms on record for each in­di­vid­ual employee to provide their em­ploy­ment el­i­gi­bil­i­ty. If you have mis­clas­si­fied an employee as an in­de­pen­dent con­trac­tor, you may be fined for not retaining their I-9 forms on record.

Failure to pay for any fines or employee back-taxes, as well as being found to be de­lib­er­ate­ly mis­clas­si­fy­ing employees, may result in criminal or civil pro­ceed­ings.

Aside from financial losses at the hands of the DoL, IRS, or state agencies for mis­clas­si­fy­ing employees, employers also open them­selves up to the pos­si­bil­i­ty of class-action lawsuits being brought against them by their employees. These can be lengthy and extremely expensive, as well as con­tribute to rep­u­ta­tion damage and the loss of potential talent.

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