Independent Contractor, or Not?

July 18, 2009 4:39 PM

Supposedly I'm an Independent Contractor. But I never signed a contract.

I began working for my most recent employer in early 2005, brought in through a temp agency. I was formally hired 6 months later as a full-time employee with health benefits, vacation time and paid salary vs. hourly. I continued to advance in the company from front desk admin to office manager. There were a number of entities under the primary company umbrella, as well as a non-profit organization. I performed work for all of them. As the economy slowed, so did all the primary businesses, so most of my work was for the non-profit.

At one point my boss came to me and said he was going to have to pay me as an Independent Contractor for "about a month or so" since the primary businesses were struggling financially. I verbally agreed to this without doing my homework as to exactly what it meant to be an I.C. This method of paying me without taxes etc being deducted from my checks continued on for 6 - 7 months of last year. At certain times I would receive standard payroll checks, but more often than not I received a check for my full wages without any deductions.

The '08 tax season was not pretty. In addition to being 1099'd to death I had final taxes to pay on my deceased mother's accounts. Never before in all my working years have I paid at tax time; I've always received a refund. Not so this year. I ended up paying close to $4k!

I spoke to my boss about this and he basically blew me off. My calculations showed that I had been underpaid by over $1k and he refuses to pay me this money - which he agrees he owes me - until some investors come through with their money, which is not likely to happen any time soon. Also, bossman was continuing to pay his portion of my group health and dental insurance through the company.

In January of this year I was told that there was no work for me, but he'd call me in on an as-needed basis. At first I was working about 20 hours per week. Over time that dwindled and I worked a total of 3 hours in May and June. Obtaining my payment for the work I'd done got to be more and more of a joke. I was told that various partners were contributing to my salary and I had to wait for each person to decide to actually pay me. Since I was *not working more than I was working I cleared my office of all personal possessions one weekend. That was about 3 weeks ago.

Toward the end of last month I called the benefits agent to discuss other health and dental insurance options. He recommended I switch to COBRA with the gov't benefit of 65/35 payment split. He called the office to have them process the necessary paperwork and was told by the gal in accounting that I was still employed there and this was not necessary (my changing my insurance).

Today I get an email from my boss sent at 6 AM (??) saying he noticed that I've cleaned out my office, would I please return my office key and call the benefits agent to switch my insurance to COBRA. Damned strange, if you ask me. It took him 3 weeks to notice my office was clean? And why couldn't I have switched to COBRA last month when I asked about it?

But I digress.... I've read up on what being an I.C. entails and what the basic rules are. My boss has pretty much violated all of them, the most glaring being continuing to pay my health and dental insurance as though I were an employee. Beyond that he dictated what hours I would work, and provided me with accrued paid vacation. He's doing all this without my ever having signed an Independent Contractor Agreement.

I'll be taking my key in sometime this next week, but I need to know how best to address this with the boss. I've been collecting unemployment since January and except for the first couple of weeks did not note any income because I wasn't being paid regularly for the work I was doing. In lieu of no Agreement being signed I want to ask him to not 1099 me this year and just call it good. I'll even forego the $1k he still owes me if he's willing to do this. (Is that a good idea, or...)

What other facts do I need to know to let him know that I am not going to play his games and I want to make as clean a break as possible. He's always been one to co-mingle funds and BS creditors like no other. I never cared until it became personal.

Help me go in there armed to the hilt so I can come out relatively unscathed financially.

Thanks.

posted by SoftSummerBreeze to work & money (17 comments total)

I am not sure in your state -- but in Vermont there are a series of "tests" that an individual needs to pass to be considered an independent contractor. I haven't looked in a few years.. but in Vermont.. I believe:

1. The individual must provide their own tools to be an I.C.
2. The individual must have other sources of income to be an I.C.

If they dont pass the test -- someone in local govt gets uppity.. I forget whom -- and I think its more they want their unemployment $$ rather than for the sake of the employee.

There are some other ones. Hopefully when you transitioned to an I.C. you received a 20% pay raise to compensate for the difference (1099 means you pay the other half of payroll taxes, as well as the other $$ the government wants). Also -- as an emloyee -- you could have received unemployment benefits when your hours were cut.

If your state is an employee at will state -- they can basically terminate you for any reason (which they did), and allow you to continue work as a 1099'd independent contractor.

What are you looking to get out of this? They *have to* 1099 you. They can't just give you the cash under the table without taxes getting taken out. Someone has to pay the government the taxes .. so either they need to do it (and w2 you), or you need to do it (and they 1099 you). They would need to go back and cover all the payroll taxes on you for the past 7 months -- which would be the same amount you would ahve to pay.
posted by SirStan at 4:50 PM on July 18

Most kinds of contracts don't have to be signed to be enforced. Oral agreement is enough. So I wouldn't press that too much.

There might be a specific statute that says that this kind of contract has to be in writing, but without talking to a lawyer in your jurisdiction you definitely should not assume there's no valid oral contract.
posted by yesno at 5:36 PM on July 18

Illegal contracts, written or oral, are not enforceable. As SirStan noted, if your job qualifies for independent contractor status depends on your state. I highly recommend you look through your state's attorney general's website for any advisories they may have on the requirements for being an independent contractor. In my state, for example, the Attorney General caught wind of a lot of companies pulling this kind of trick and promptly sent out an advisory to all companies informing them that sort of thing was illegal.

But the important thing to remember is: a company that's shitty to their creditors when times are good is going to be even shittier to their employees when times are bad. Always.
posted by ifandonlyif at 6:23 PM on July 18 [1 favorite]

Hmm . . that's complicated. Best bet is to consult with an attorney who knows the law in your jurisdiction. Many attorneys will provide an initial consultation without a fee.

As yesno says, contracts don't have to be written to be enforceable. Most states have some form of the Statute of Frauds, which states the circumstances under which a contract must be in writing to be enforced. It doesn't sound like your employment contract falls under any of those circumstances, so if there was an agreement for you to be an independent contractor, it probably doesn't need to be in writing.

Your potential liability here includes the wages you're owed, taxes owed on the income you've been paid, tax evasion penalties if your employer doesn't report your income, plus the potential loss of your health insurance. Additionally, if you are an independent contractor, and not covered by insurance, and you haven't been offered COBRA, the employer may be liable to you for statutory damages of up to $1000 per day. You say that your employer is one to "co-mingle funds and BS creditors"--that could involve fraud or even RICO. You don't want to take on any liability for that.

Lawyer up. Your situation is way too complicated and your potential liability too high to trust to anonymous internet advice.
posted by fogovonslack at 6:25 PM on July 18

Being an independent contractor under IRS rules has some very specific qualifiers. I agree, find an attorney.
posted by HuronBob at 6:31 PM on July 18

Here's the problem: Both of you broke the IRS rules. Honestly, I don't even understand how you are collecting unemployment insurance. As it is now, you and your boss run a serious risk of being audited by the IRS -- and that's not fun. You know that you are supposed to be paying your taxes quarterly, right?

I have no advice about how you can talk him into bringing you back on, and then cutting you lose. Really, if I were you I'd talk to a CPA to have him look into your paperwork (I hope you kept the paycheck stubs, when you sometimes got a check via payroll?).

I don't recommend trying to get a contract signed retroactively, but here are some links I posted in another AskMe which might help you understand contracts, payments, your rate, and so on -- hopefully to bolster your conversation with your manager. And here I've linked to pertinent IRS topics.

So, my small piece of advice, besides getting a professional involved: Get everything in writing. You're going to need it.
posted by Houstonian at 6:32 PM on July 18

I'm not going to sugarcoat this.

The intensity of your boss's ignorance could blister paint. And you've allowed him to put you BOTH in a horrible legal and financial position with respect to taxes and employment status, and in the process, probably broken a whole bunch of laws at both the federal and state level.

I'm not sure what your boss thought he was gaining by trying to switch your label from "employee" to "independent contractor" - except that he wanted to pay you less than he previously did.

Except, he obviously doesn't know what the hell an independent contractor really is - because it's not just a label you can swap willy-nilly. The substance of the work you do for them, and they way in which you do that work, is what controls whether you qualify as an independent contractor. If you do qualify, then you have an obligation to make sure your taxes get paid, because they're no longer withholding it for you. (See, e.g., your 2008 tax nightmare.) If you DON'T qualify as an independent contractor - and my Magic 8-Ball says "Signs point to No" - then your boss has probably violated federal and state tax law by failing to withhold your share of payroll and income taxes.

Now, your boss is supposed to know all this, because he's, well, your BOSS. You, on the other hand, are learning this the hard way, but you're compounding your error by coming to MeFi for tax and financial advice on things that, if you get them wrong, you could go to jail. (Don't think it happens? Say hi to Richard Hatch and Wesley Snipes for me.)

You need to get yourself to an employment lawyer and a professional tax advisor, pronto. Do not pass go. And find yourself another job before your boss gets you in even deeper trouble.
posted by mikewas at 6:48 PM on July 18 [4 favorites]

Agreeing with the above, this is a messy situation. SirStan is right about Vermont (they actually have three test conditions), but it does vary by state. Your best bet is to get formal legal advice. Your next best bet is to at least recognize that you are going to be liable for all your taxes, etc. even if the company wasn't doing there part right - but only if you really qualified as an independent contractor. If they were actually treating you as an employee you may never have been.

I don't think the key issues is the verbal agreement (which is binding if enforceable), but rather whether both sides then proceeded to conduct themselves as appropriate. If not, you may be entitled to the rights of employment anyway.

Bottom line: you have way more to gain than to lose by getting some local expert opinion.
posted by meinvt at 6:51 PM on July 18

The IRS will hold the employer--not the employee--responsible for making the determination of whether the employee is in fact an employee or IC.

From the IRS website: "Consequences of Treating an Employee as an Independent Contractor
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.." Found by googling "irs independent contractor".

There's much more information there. Take a look.

Sounds like your former employer may have been attempting to dodge taxes. Maybe you'll even get a big fat refund on this!
posted by choochoo at 7:52 PM on July 18 [2 favorites]

I'm a partner in a software consulting company in Massachusetts. In this state it is basically illegal for us to bring programmers on board as contractors. We could have a janitor or a plumber who is a contractor, but anyone who engages in our primary business (programming) has to be on a W-2; they cannot be on a 1099.

This has been annoying at times, because we have people who want to be on a 1099. But that's the law in Mass. In other states it is not quite so strict.

Based on what you've said, though, and with the caveat that IANAL, it sounds like your employer has probably broken the law. The question is what you do with that information. I'd lawyer up as a first step, to see what your options are.
posted by alms at 8:28 PM on July 18

If you are getting unemployment and the option to get COBRA then you are getting some very significant benefits from NOT being treated as an independent contractor. Furthermore, while he wasn't witholding taxes (and probably not paying into social security or unemployment) he did pay your health care costs, which are probably worth more than $1k. I would be careful and get professional advice (NOT mine) before threatening your boss.
posted by metahawk at 8:35 PM on July 18

I am going to give you the advice that I think you need to follow. Seeing what you've done so far, I don't know if you will follow it. However, I'm not going to ignore the right and correct thing to do in this situation just because I'm fairly certain you won't do it.

There are two problems here; that is, two crimes have been committed, or, at the very least, two serious misunderstanding and misuses of tax law have happened. You need to take care of them in order of seriousness.

1.

First, look in the mirror and admit to yourself that by illegally collecting unemployment benefits you have committed federal tax fraud. Don't sugar-coat this; don't gloss over it or ignore it. That's precisely what it is: tax fraud. Unemployment insurance is for people who are unemployed - not for people who have temp jobs that don't give them regular enough hours, or who aren't making enough to make ends meet, or who have to deal with bills relating to a death in the family.

I'm not saying this to give you a guilt trip, and I don't suggest you fall over with shame; this is financial shit, and it can be very odd and confusing, especially in times when employers act (as yours did) like criminals. What I'm trying to do is give an impression of just what kind of very real danger you're in right now. You can say to yourself, 'well, whatever - what are the chances the IRS will audit me anyway, right?' Since they audit accounts largely based on the number of 'red flags' a particular taxpayer raises, I'd say.. well, your chances are incredibly high. Let's review this, shall we?

Recent close family death which had a significant financial impact.

Sudden inexplicable change in employment status from 'employee' to 'independent contractor.

The largest single tax payment ever owed in taxpayer's history.

Very, very odd goings-on surrounding insurance situation.

Employer's tax reporting habits are (almost certainly) erratic at best and completely incomprehensible at worst.

Seriously, man - if the IRS doesn't audit you, who the hell do they audit? The IRS may be slow, but they're not completely stupid; I've had them come back to me on discrepancies (unintentional and minor, thank god) on taxes from five years before, so you can be sure that someday this thing will come back to you. And when it does, well, you can also be sure that this is something that people go to jail for all the time.

So the first step, I think, is for you to assume you're going to get caught, face up to it, and take complete care of it now. I am pointedly not recommending that you call the police or the IRS or the state and turn yourself in. Call a tax attorney. A lawyer's job is advocating for people; a big part of that is helping people who have committed some crime but who deserve some leniency because of a whole slew of extenuating circumstances - like you. Whereas the state beaurocracy might blithely steam-roll over your case and stick you in jail or charge you a ridiculous amount of money; you need someone to tell you how you can most carefully turn yourself in and how you can take care of this with the least impact possible on your own life. A lawyer can tell you a lot more about what your options are and what consequences you may or may not face in this situation.

Again, I want to strenuously emphasize the fact that you don't want this hanging over your head for years to come. It's a very bad thing.

2.

The lesser crime, though still a crime, has been committed by your ex-boss. He quite consciously tried to change the status of an employee solely in order to save tax money. That doesn't work. There is only one party who is authorized to decide who is and who is not an independent contractor: the IRS. It's not your boss' choice, and it's not your choice. The link choochoo gave above was a good one for information straight from the horse's mouth about what is and is not supposed to happen in this situation.

By the way, you have a misconception about the meaning of the term 'independent contractor;' it has the word 'contract' in it, but it hardly ever actually involves one. I've worked many jobs as an independent contractor, but I've never once signed anything. In the eyes of the law, 'independent contractor' is simply a designation which refers to the nature of the work you do and your relation to the person who's paying you; it has nothing to do with signing a piece of paper.

This is also a situation that a tax lawyer can help you with. My guess is that he'll have you file a 1040 and a 1040X for the 2008 tax year; this is your right, since, as an employee, you have a right to pay the taxes at the lower rate. (You have to file them using a 1040 first; that's why you'd have to file both at once.) It's perfectly legal and acceptable to refile your taxes if you believe that you lost money by filing them improperly; see the 1040X instructions for more details. Paying any other taxes is generally between your boss and the government. But, again, you'd need a tax attorney to tell you more precisely how this all works and what it means.

Good luck. I know this is a lot of trouble, and it's not only a hassle but it's frightening. You'll be okay, I think, as long as you face this down and make sure you're really taking care of it rather than putting it off and forgetting about it.
posted by koeselitz at 10:53 PM on July 18 [4 favorites]

I'm pretty sure if you write down your unemployment insurance pay for your federal taxes, you are not committing tax fraud. Unemployment insurance is insurance that companies purchase. It's insurance. That money does not come from taxes. When you file a claim, the first thing they do is verify that your employer has paid for your coverage and that you meet all the circumstances necessary for collecting the claim. If the poster is collecting it, she's qualified to collect it.

That's not to say she doesn't have a very big tax problem on her hands.

I'm guessing you do not make very much money, and don't have a lot to spend getting lawyers and tax accountants to sort out this mess. Why not do this: Grab a big fistful of quarters, and go find a pay phone somewhere. Call the IRS, do not identify yourself, but explain in general terms what has happened, and ask them what to do. This is shocking for us to hear, but I bet it won't even be the first time today that the IRS has heard of this.

I recommend doing it via pay phone, because I'm a little paranoid. Audits, you know. Phone numbers for the California offices are here.
posted by Houstonian at 3:48 AM on July 19

Wait, I take that back.

In February, you asked, "Would I be out of line to ask for (and expect) 6 months of health insurance (med & dental) and $4k severance pay ($1/year of employment)?"

Today, your question says that he's paid your insurance. So I wonder if this whole mess was, in part, a verbal (and illegal) agreement you and your boss struck back in February? Which you initiated? Maybe the deal was something like, "You pay my insurance and pay for every hour I work as a contractor, and I'll collect unemployment to boot, in lieu of the severance I requested"? That may have made great sense to you then, but it is a messy solution.

You are compounding the problem if you ask him to not 1099 you this year (which is getting paid under the table). That's outright fraud. The payroll person at your company will probably state that it's impossible to hide your earnings without cooking the books. It's not a serious solution.

In addition, you said the business itself is real estate development. In California. It's possible he's going bankrupt, which is going to add significantly to your woes if he does owe you any money. Not to mention, it will open his finances up for scrutiny.

You may not be able to afford an attorney, but I think you can't afford not to visit one at this point.

I know you were hoping for something smart to say, to help you collect some money from your former boss, but your problem is much bigger than that.
posted by Houstonian at 4:25 AM on July 19

Houstonian: I'm pretty sure if you write down your unemployment insurance pay for your federal taxes, you are not committing tax fraud. Unemployment insurance is insurance that companies purchase. It's insurance. That money does not come from taxes. When you file a claim, the first thing they do is verify that your employer has paid for your coverage and that you meet all the circumstances necessary for collecting the claim. If the poster is collecting it, she's qualified to collect it.

This is 100% wrong. Unemployment insurance is a welfare benefit funded directly by taxes paid by employers. In fact, that's why employers hate having employees in the first place, and try often (as in this case) to switch those employees over to independent contractors; because as long as they're employees, employers have to pay the very expensive federal unemployment insurance tax. However, it is a joint program that is funded through taxes collected federally but administered at the state level. As such, it is often quite possible to collect unemployment insurance (which, again, is a federal welfare benefit; it was started in 1935 as one of FDR's responses to the Depression) by filling out the forms even if you're still working, since states frequently don't audit their books as often as they should. [cite]

That's tax fraud.
posted by koeselitz at 12:14 PM on July 19

FTR, when I applied for UI I was completely honest with them and told them my hours had been cut significantly and future work was uncertain. As is their practice, they also confirmed this with the employer.

Thank you all for the information you've provided. I'll be contacting my CPA and an employment attorney today/this week.
posted by SoftSummerBreeze at 10:12 AM on July 20

Awesome. That's great. I'm sorry - I didn't know what exactly had happened.

Go after your ex-boss - you should not have to pay such extraordinary taxes, and you are entitled to a re-filing and a refund of whatever money you should not have had to pay.
posted by koeselitz at 11:40 AM on July 20