Advertisement
Business Costs & Regulation

When Is an Independent Contractor Really an Employee?

Many businesses, especially tech start-ups, fudge on legal distinctions to keep their labor costs low and cap their official employee count.

Q. My son works for a big tech company as a so-called independent contractor, but it seems to me that he’s really an employee in everything but title. He works only for that company, puts in very long hours and is closely supervised by company managers (albeit off-site). He doesn’t get employer-paid benefits, the firm expects him to pay self-employment taxes, and he won’t qualify for state unemployment relief if his contract isn’t renewed. This doesn’t seem right to me. What do you think?

Advertisement - Article continues below

A. It smells fishy to me, too. As you describe it, this relationship wouldn’t meet the IRS’s multipart test for legitimate independent-contractor status. Your son’s employer is running the risk that his job (and perhaps others at the firm) will be reclassified by the IRS as conventional employment, with penalties assessed for back employment taxes and perhaps overtime.

The federal government and class-action labor lawyers are getting aggressive on this issue. In a case that will probably end up before the Supreme Court, a federal appellate court in San Francisco recently ruled that FedEx drivers in California and Oregon, whom the company considers independent contractors, are really employees in virtually every way. And some drivers for the car-sharing services Uber and Lyft are also challenging their independent-contractor status.

Advertisement
Advertisement - Article continues below

The issue isn’t going away, as many businesses, especially tech start-ups, fudge on legal distinctions to keep their labor costs low and cap their official employee count under thresholds that trigger coverage requirements for various federal programs, such as family leave and health care.

There is much to recommend genuine independent contracting, both to employers and to the contractors themselves. Many workers value the freedom to set their own hours and place of work, serve several different clients, and deduct their own business expenses from their income.

But in my experience, companies that honor their workforce with attractive pay and benefits—plus the security and legal rights of genuine employment—are rewarded with good perform­ance and low turnover.

Advertisement

Most Popular

2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
Searching for the Perfect Place to Retire
Empty Nesters

Searching for the Perfect Place to Retire

We home in on two places with less traffic and lower costs. 
July 2, 2020

Recommended

Travel Planning in the Time of Coronavirus
business

Travel Planning in the Time of Coronavirus

Insurance may not cover canceled vacations, but airlines and hotels may be flexible.
June 11, 2020
13 Things That May Soon Disappear Forever (The Pandemic Edition)
business

13 Things That May Soon Disappear Forever (The Pandemic Edition)

Emerging technologies (and now the COVID-19 pandemic) are putting an end to these familiar items and practices.
June 9, 2020
Don't Let the Drama Surrounding PPP Distract You from Running Your Business
business

Don't Let the Drama Surrounding PPP Distract You from Running Your Business

If you're so wrapped up in worry about your Paycheck Protection Program loan not being forgiven, think about the worst-case scenario. It might not be …
June 5, 2020
Another Epidemic to Worry About: Identity Theft
business

Another Epidemic to Worry About: Identity Theft

Fraud losses grew in 2019 and are likely to increase in 2020.
June 5, 2020