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Employee vs. Contractor?

October 28, 2011
By Gary Reynolds, Chairman, NADA Regulatory Affairs Committee

More than ever, dealerships should act with caution when deciding whether to classify workers as “contractors” versus “employees.” Following several recent unsuccessful attempts by Congress to legislate the issue, the Obama administration is making worker classification an enforcement priority.
Misclassifying “employees” as “independent contractors” risks serious liabilities, including unpaid federal, state, and local income tax withholdings; Social Security and Medicare contributions; wages including overtime; workers’ compensation and unemployment insurance premiums; employee benefits; and penalties.
The Internal Revenue Service and the Department of Labor agreed in September to a coordinated enforcement effort on employee misclassification. The stated goal of this $30 million plus effort is to ensure better protections for employees and to level the playing field for law-abiding employers.
The IRS also has launched a Voluntary Classification Settlement Program aimed at encouraging employers to confess to past worker misclassifications. In addition, several states are focusing enforcement resources at worker misclassification, in part motivated by the potential for additional tax and premium revenues. Lastly, there lately has been an increase in the number of unemployment insurance and workers’ compensation claims brought by “independent contractors” arguing that they should have been classified as “employees.”
The heightened level of federal and state scrutiny in this area may warrant that dealerships carefully review and document how their workers are classified. When making worker classification decisions, dealerships should be careful, be conservative, and be prepared to document, document, document.
The IRS, the DOL, and the states use multifactor legal standards and tests to evaluate whether workers are “employees” or “independent contractors.” Of greatest importance: the level of control that employers exercise over workers as measured by the means and manner of the work performed. Both the DOL and the IRS have instructive fact sheets on their websites addressing this issue.