Employee Vs. Independent Contractor

It is not uncommon in the entertainment industry for employers to misclassify their employees as independent contractors. Government estimates indicate that approximately 20%-35% of all employees are misclassified as independent contractors.  The problem is so significant that Federal and State agencies have recently commenced initiatives aimed at investigating misclassifications of employees and prosecuting their employers. The categorization of whether an individual is an employee or an independent contractor can have many implications.  Employees are often granted benefits and protections not given to independent contractors.  Additionally, independent contractors are responsible for certain taxes that would otherwise be the responsibility of their employers.

Determination of employee status:

It is not your Employer who decides if you are an independent contractor or not. Both the IRS and the National Labor Relations Board can make the determination of whether or not a worker is correctly classified as an independent contractor. The determination of whether an individual is an employee or an independent contractor is contingent on several factors.  The following factors are commonly associated with employee status:

  • employees receive instruction as to how, when, or where to work
  • employees receive employer provided training
  • employees do not have a financial investment in their work
  • employees compensation is not contingent on whether or not the business yields a profit or a loss
  • employees often receive benefits

For more information go to www.irs.gov/pub/irs-pdf/p1779.pdf

Things you give up as an independent contractor:

  • EARNINGS – Independent contractors are responsible for both halves of social security and medicare tax. This can cost an individual approximately 7% of their earnings.
  • WORKING CONDITIONS – Independent contractors are often not compensated at increased rates for overtime worked.  Furthermore, independent contractors are often not reimbursed for work related expenditures.
  • SECURITY – Independent contractors are not eligible for unemployment benefits or workers’ compensation benefits should they get hurt on the job.
  • BENEFITS – Employees generally receive some form of health and retirement benefits.
  • UNION – Independent contractors are ineligible to be represented by a union.

How do I get reclassified from independent contractor to employee?

Individuals who believe they are misclassified as independent contractors may request determination of employment status from the IRS by filing form SS-8. There is no fee for filing. Consider the benefits obtained should redetermination be made (unemployment, health, pension, disability, etc). Obtain a copy of the Form SS-8 at www.irs.gov/pub/irs-pdf/fss8.pdf. The National Labor Relations Board will also review your status in the event a petition is filed by a union seeking an election to represent you and your coworkers.

Recent governmental initiatives:

In September 2011, Secretary of Labor Hilda Solis signed a Memorandum of Understanding between the Department of Labor and the Internal Revenue service whereby the agencies will work together to reduce the number of misclassified employees and improve compliance with federal labor laws.The 2011 Department of Labor annual budget included $25 million to be utilized by various agencies to investigate and prosecute employers who misclassify employees as independent contractors. As a result of these initiatives, many employers have been found misclassifying employees and have had to pay back wages and liquidated damages. For information about current cases visit: this and related initiatives visit http://www.dol.gov/whd/workers/misclassification/pressrelease.htm

Penalties for misclassification:

Employers who deliberately misclassify employees as independent contractors can be held responsible for all of the employment taxes (including income, unemployment, social security and medicare taxes) that should have been paid as well as a personal penalty of 100% on each and every officer of the company.