MISCLASSIFICATION OF WORKERS
What is the misclassification of workers?
Misclassification of workers occurs when an employer incorrectly classifies workers as independent contractors rather than employees.
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Why is it important to
correctly classify workers?
An employer has different legal, tax and financial obligations depending
on how a worker is classified. For example, if a worker is classified
as an employee, the employer
is required to:
-
withhold income, F.I.C.A. (Social Security) and Medicare taxes
from the employee’s wages;
-
pay F.I.C.A. (Social Security) and Medicare taxes in addition
to the employee’s share;
-
pay unemployment taxes (which provides insurance coverage in
case the worker is laid off;) and
-
buy workers compensation insurance (which provides insurance
coverage in case the worker is injured on the job).
If a worker is classified as an independent contractor,
the employer generally does not have those obligations and the worker
is required to:
- make quarterly estimated payments for income taxes, and;
- pay self employment taxes.
An independent contractor is not entitled to unemployment compensation
and, in many cases, will not receive workers compensation if injured
on the job.
Most importantly, the intentional misclassification of
workers is illegal and constitutes tax and insurance evasion. Employers
engaging in this practice may be subject to significant penalties
and fines.
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What is employment?
Employment is defined in K.S.A.
44-703, Chapter 44, Article 7. According to this statute, employment
means:
-
Services performed by an individual for wages under any contract
of hire is employment unless it is shown that:
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The individual has been and will continue to be free from
control or direction over the performance of the services, both
under the individual's contract of hire and in fact;
AND
-
The service is either outside the usual course of the business
for which the service is performed or that the service is performed
outside of all the places of business of the enterprise for
which the service is performed.
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Who is an employee?
An employee is anyone performing services for an
employer who controls what will be done and how it will be done
by the worker. This is true even if the employee has freedom of
action. What matters is the right of the employer to control the
details of how the services are performed.
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Who is an independent
contractor?
Independent contractors have an independent trade,
business, or profession. They offer their services to the public
and are generally not employees. However, whether they are employees
or independent contractors depends on the facts in each case. The
general rule is that an individual is an independent contractor
if the employer controls or directs only the result of the work
and not the means and methods of accomplishing the result.
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Who determines if a worker
is an employee or an independent contractor?
The Kansas Department of Labor is responsible for investigating
worker classification by employers.
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How does the Kansas Department
of Labor determine if a worker is an employee or an independent
contractor?
The right of control, whether or not exercised, is the most important
factor in determining the relationship. An employer-employee relationship
exists when an employer has the right to exercise
control over the manner and means by which the individual performs
services. The right to discharge a worker at will and without cause
is strong evidence of the right of direction and control. The following
factors should also be taken into consideration:
-
Is the one performing the services engaged in a separately
established occupation or business?
- Is the work usually performed without supervision in that locality?
-
What skill is required in performing the services and accomplishing
the desired result?
-
Who supplies the tools, equipment, and place of work for the
person doing the work?
- Is the performance of services an isolated or continuous event?
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What is the method of payment, whether by time, a piece rate,
or by the job?
- Is the work part of the regular business of the employer?
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What is the extent of actual control exercised by the employer
over the manner and means of performing the services?
-
Are the services performed for the benefit or convenience of
the employer as an individual or for the employer’s business
enterprise?
-
Can the worker make business decisions that would result in
a financial profit or loss for the worker? Investment of the worker's
time is not sufficient to show a risk of loss.
A written contract that claims to create an independent contract
relationship is worthless if the practice of the parties shows that
the employer retains the right to control the means and manner in
which services are performed.
Generally an employer-employee relationship is found to exist when
the work being done is an integral part of the regular business
of the employer and the worker does not furnish an independent business
or professional service to the employer.
Also see "What is employment" question for
more detail
.
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What difference does
it make if workers are misclassified?
A business that intentionally misclassifies employees creates a
number of costs for a variety of people. The costs avoided do not
go away, they are simply borne by other people.
-
A worker misclassified as an independent contractor rather
than as an employee suffers several adverse consequences. The
worker is responsible for payment of income and self-employment
taxes. Self-employment taxes are a higher cost for the worker
because self-employment taxes include a portion of the F.I.C.A.
(Social Security) and Medicare taxes that would have been paid
by the employer.
If laid off from a job, the misclassified worker must bear
the financial consequences and is usually not entitled to unemployment
compensation.
If injured on the job, the misclassified worker is often not
entitled to workers compensation benefits and must pay medical
expenses and bear the financial burden of lost income.
-
Businesses that intentionally misclassify workers put other
businesses at a competitive disadvantage.
-
In the end, honest Kansas taxpayers must pick up the remaining
cost.
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How can I report employment
misclassification?
You can report suspected misclassification to the Department of
Labor and Department of Revenue on this website. The Departments
will investigate all reports submitted via this website.
Click
here to report misclassification
.
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What are the penalties
that an employer maybe subject to if the employer misclassifies
a worker?
Unemployment Taxes
K.S.A.44-117 states: (a)(1) Penalties on past-due reports, interest
on past-due contributions, payments in lieu of contributions and
benefit cost payments. Any employer or any officer or agent of an
employer, who fails to file any wage report or contribution return
by the last day of the month following the close of each calendar
quarter to which they are related shall pay a penalty as provided
by this subsection (1) for each month or fraction of a month until
the report or return is received by the secretary of labor. The
penalty for each month or fraction of a month shall be an amount
equal to .05% of the total wages paid by the employer during the
quarter, except that no penalty shall be less than $25 nor more
than $200 for each such report or return not timely filed.
Contributions and benefit cost payments unpaid by the last day
of the month following the last calendar quarter to which they are
related and payments in lieu of contributions unpaid 30 days after
the mailing of the statement of benefit charges, shall bear interest
at the rate of 1% per month or fraction of a month until payment
is received…
K.S.A. 44-719 states:
(e) Any employer or person who willfully fails or refuses to pay
contributions, payments in lieu of contributions or benefit cost
payments or attempt in any manner to evade or defeat any such contributions,
payments in lieu of contributions or benefit cost payments or the
payment thereof, shall be liable for the payment of such contributions,
payments in lieu of contributions or benefit cost payments and,
in addition to any other penalties provided by law, shall be liable
to pay a penalty equal to the total amount of the contributions,
payments in lieu of contributions or benefit cost payments evaded
or not paid.
Worker Compensation
K.S.A. 44-5,120 states: (d) Fraudulent or abusive acts or practices
for purposes of the workers compensation act include willfully,
knowingly or intentionally: (2) misrepresenting to an insurance
company or the insurance department, the classification of employees
of an employer, or the location, number of employees, or true identity
of the employer with the intent to lessen or reduce the premium
otherwise chargeable for workers compensation insurance coverage.
Essentially, it is considered a fraudulent act to represent employees
as a different classification for the purpose of obtaining a cheaper
premium.
With regard to penalties, K.S.A. 44-5,120(g) provides for a couple
different options:
(g)(1) Payment of a monetary penalty of not more than $2,000 for
each and every act constituting the fraudulent or abusive act or
practice, but not exceeding an aggregate penalty of $20,000 in a
one-year period.
(g)(2) Redress of the injury by requiring the refund of any premiums
paid by and requiring the payment of any moneys withheld from, any
employee, employer, insurance company or other person or entity
adversely affected by the act constituting a fraudulent or abusive
act or practice.
Based on the two penalty provisions listed above, an employer potentially
could be charged according to the number of times he misrepresents
an employee and/or the amount of premium that should have been paid
had the employees been classified correctly. Determining what penalties
to charge depends on the facts of each case.
Withholding Tax
Generally, every employer required by federal law to withhold upon
wages pursuant to the federal internal revenue code shall, whenever
the wage recipient is a resident of Kansas or the wages are paid
on account of personal services performed in Kansas, withhold and
deduct from such wages an amount to be determined in accordance
with K.S.A. (2005 Supp.) 79-32,100d, and amendments thereto.
Employers who fail to withhold upon their employees' wages or otherwise
fail to comply with the provisions of the Kansas Withholding and
Declaration of Estimated Tax Act shall be subject to the penalty
provisions set forth in K.S.A. 79-3228 and 79-32,107, and amendments
thereto. Such penalties range from 1% per month of the unpaid balance
of tax due up to 100% of the unpaid balance of tax due, plus interest
on the unpaid tax at the rate established by law.
If you are seeking
more specific information regarding Withholding tax penalties and
interest click here
.
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