Many employers have trouble understanding the difference between a contract employee and a payroll employee. The definitions are outlined in this article, Form 1099-MISC & Independent Contractors published by the IRS, which opens by admitting how complex the issue is. Many employers think a 1099 employee is a part-time employee, or an employee who works occasionally or seasonally. In reality, the central difference between a 1099 and payroll employee is who controls how the worker performs his or her services. At stake for the employer is a good deal of savings on payroll fees and taxes if the employee can be classified as a contractor.At stake for the worker are important benefits and employment perks – such as worker’s compensation coverage.
Compensating for high’s and Lowe’s
A class action lawsuit brought by roughly 4,029 installers and 949 installation companies argues that Lowe’s supplied the materials and the place of work for the installers, and that Lowe’s “had the right to control the performance of the installers’ work.” The workers who contract with Lowe’s charge that they are being miscategorized as contractors under California law – the suit was filed in U.S. District Court in Oakland. While Lowe’s strongly denies the allegations, they have offered a $6.5 million settlement.
The letter of the law
The IRS’s definition of contractors is, indeed, a head-scratcher, leaving all kinds of companies open to interpretation of their employment policies, and potentially to the type of suit that Lowe’s faced. This is not just a question for the contracting industry. Tech companies and big corporations have 1099 employees seated in assigned desks, working hours dictated by the company, in clear violation of the spirit of the IRS’s definition. On the other hand, there are plenty of companies who diligently establish corporate policies about the differences between payroll and contract employees who may be just as vulnerable.
Companies that get stuck in a regulatory defense suit in an area this murky and grey might be forced to settle. Consider what might be at stake – legal fees, a class action settlement, and a fundamental shift in how your workforce is structured – and work with your legal team now to do the best possible job of achieving compliance, but back up your decisions with enough coverage to be able to withstand a suit if it were filed. Captive insurance was designed to meet challenges like this one. If we can help you structure a Captive, please contact us.