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Attorney Nicole Marklein explains the importance of correctly classifying workers as employees or independent contractors under Wisconsin law to avoid costly legal consequences, emphasizing that industry practices do not determine proper classification.
Imagine that you are a retail business and want to hire someone to design a beautiful website for you. Do you have to treat that person as an employee, or can you treat them as an independent contractor? The answer is almost always “it depends.” However, the misclassification of employees as independent contractors in Wisconsin is one of the most common mistakes employers make—and it can be extremely costly.
What is the law?
Businesses are required to treat individuals performing work for them as employees unless certain circumstances are met. This includes withholding and paying employment taxes from the employee’s wages, ensuring that the employee is covered by worker’s compensation coverage should she or he be injured on the job, and paying the appropriate amount into the state unemployment insurance fund based on the number of individuals employed by the business.
Businesses can mistakenly classify an individual as an independent contractor instead of an employee because there are a number of different laws that apply to determine proper classification, and each one is different. Below are links to just five different standards for determining whether an individual must be treated as an employee, depending on the law at issue:
- IRS (income/employment taxes):
https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee - Wage and Hour Laws (minimum wage/overtime):
https://www.ecfr.gov/current/title-29/subtitle-B/chapter-V/subchapter-B/part-795< - OSHA (workplace safety regulations):
https://www.osha.gov/laws-regs/standardinterpretations/1990-03-13 - Wisconsin Worker’s Compensation:
https://dwd.wisconsin.gov/wc/employers/independent-contractors.htm - Wisconsin Unemployment Insurance:
https://dwd.wisconsin.gov/worker-classification/
Please note that this is not a full list of every test that applies to determine whether an individual is an employee or an independent contractor. Rather, this list is meant to underscore that employers should not assume that an individual who meets all requirements to be classified as an independent contractor for purposes of one law will meet the requirements under all applicable laws.
For example, the IRS standard looks at the three general categories of:
1. Behavioral Control Over the Individual;
2. Financial Control of the Individual; and
3. Type of Relationship Between the Business and the Individual.
Each of these categories then has its own set of factors to consider. However, these factors do not operate as a checklist. Instead, the determination depends on the overall circumstances, and the factors should be used as guidance, but compliance with a certain number of them does not guarantee that the individual can be treated as an independent contractor. On the other hand, the Wisconsin Worker’s Compensation test, for example, lists nine specific factors that must be satisfied for an individual to be considered an independent contractor under that law. If just one of the factors is not satisfied, then the individual must be treated as an employee subject to worker’s compensation coverage.
What are some common mistakes?
In addition to failing to consider all of the many tests that apply, many businesses assume that they are safe to treat someone as an independent contractor if that is consistent with the general practice in their industries (“Everyone else does it this way.”) Hair salons, construction, trucking, home health care and ridesharing are all examples of industries that have faced increased enforcement efforts, despite the widespread use of independent contractors by competing businesses in these sectors.
Another common mistake is for a business to believe that there is no legal risk for improperly treating someone as an independent contractor if the individual agrees to the arrangement. In fact, businesses can be subject to harsh consequences even when the individual insists on being treated as an independent contractor instead of an employee.
What are the risks of misclassifying someone as an independent contractor?
Improperly treating an individual as an independent contractor can have disastrous financial consequences for a business. Moreover, a business can find itself faced with these consequences even if neither it nor the individual contractor raise concerns about the arrangement. Two common examples illustrate this:
1. Injury
John Smith Builders (“JSB”) is in the business of constructing and remodeling single-family homes. Joe Shmoe is a local drywaller who comes highly recommended to JSB. JSB hires Joe Shmoe as a subcontractor on a home that it is building in Wisconsin. Unfortunately, Joe was very seriously injured while working on the home construction project when he fell from a ladder. Joe sustained several severe fractures, requiring a number of surgeries and rehabilitation. Joe’s health insurer looks to recover the cost of Joe’s medical expenses from JSB’s worker’s compensation insurer. It is then discovered that JSB was improperly treating Joe as an independent contractor instead of an employee, and Joe was not covered by JSB’s worker’s compensation policy. As a result, JSB is required to pay for all of Joe’s medical bills, which total over $450,000 to date. Adding insult to this injury, JSB is required to pay significant penalties to the Wisconsin Uninsured Employer’s Fund. JSB is also waiting to see if it will be audited under other laws for its misclassification of Joe.
2.Unrelated Claim for Unemployment Insurance Benefits
A misclassification can be discovered in connection with an individual’s claim for unemployment insurance benefits that have nothing to do with your business.
ABC Corporation is a marketing firm. It hires Jane Doe to clean its office space once per week and treats her as an independent contractor. In addition to performing cleaning services for ABC Corp., Jane also works as a server at a local restaurant. Jane is laid off from her job at the restaurant because business has been very slow. As a result, Jane applies for UI benefits through the State of Wisconsin. As part of her application for benefits, Jane is required to list all of her sources of income, so she lists the income she receives for cleaning for ABC Corp. The UI office sees that Jane is not listed as an employee with ABC Corp. for UI purposes and investigates further. It determines that Jane should have been treated as an employee by ABC Corp. all along. The UI division then requires ABC Corp. to pay all amounts it should have been contributing to UI for Jane over the years, plus additional penalties. This then triggers audits by the IRS, the Wisconsin Department of Revenue, and the Wisconsin Worker’s Compensation Division, which all assess their own demand for back payments and penalties.
West & Dunn is here to guide you to structuring your workforce in a manner that is both legally compliant and that works for your business. Do not hesitate to contact our team online through our Contact Us page or by telephone at (608) 535-6420 to get started.
