Place your bets! Contractor vs. Employee
November 6, 2007 4:10 PM
Has anyone ever tried to negotiate with their employer after discovering they were misclassified as a contractor (vs. an employee)?
I work for a relatively large organization (approx. 900 staff) and recently found out I was misclassified as an independent contractor in the past. I stumbled upon an article on an employment blog about the issue of being classified as either a contractor or an employee. I never realized it was such a big issue but apparently it happens a lot and the IRS considers it a serious offense. The article listed 20 items that the IRS considers when make the determination. According to this list, I was not even close to being considered a contractor. I won't bore you with the details, but trust me when I say I was an employee without a doubt according to this list. Also, the exact same position is now classified as an employee.
I openly admit I was an idiot to not bring this up when I was hired, but I can't change the past. I was told they were paying me as a contractor to keep my position "off the books" so my pay would show up as "contracted services" vs. salary in the budget. I was also told that our jobs would be eliminated if the board knew we were technically employees. I honestly didn't care as I just finished school and was desperate for a job.
The main issue to me is unpaid overtime for the many times I worked more than 40 hours a week (sometimes more than 60 hours per week), unpaid vacations, unpaid holidays, unpaid sick days, having to pay my own health insurance and the fact that I paid my employer's share of my income tax. The worst thing is that I didn't participate in my employer's retirement system for those 2 years and, as a result, am not vested yet. I recently turned down a great job because I didn't want to lose my retirement.
I was hired as a contractor 6 years ago and then hired by the same company as a salaried employee 4 years ago. So, I was misclassified for approx. 2 years and that ended approx. 4 years ago. If it matters, there are about 6 other employees in the same situation as myself (except most of them were contractors for 3 or 4 years). In my state's Department of Labor (PA), there is a statute of limitations on things like unpaid overtime of 2 years. I'm not a lawyer but I assume that would greatly limit my options to sue for reimbursement. As for getting paid more money as a contractor (to somehow justify what my company did), they paid me exactly the same as an employee plus giving me the usual benefits. So, I actually made much less as a contractor.
I mentioned this issue to my HR manager (whose a pretty good friend of mine) and, after admitting that she agreed I was misclassified, she said she'd check into it. I asked her for an update today and she said she's waiting to hear back from their attorney. Well, obviously they are going to find out what I already know: that I have no real recourse.
However, there is the issue of the back taxes they owe to the IRS. As I understand it, they are still within the statute of limitations for the taxes. I researched the subject and found that they would most likely be fined heavily in addition. The only thing I can't find through my research is what effect (if any) it would have on me. I can't find any mention of me getting those taxes back. One article I found actually implied that my company wouldn't have to pay the IRS (or pay me back) at all if they could prove I already paid the taxes. If I don't benefit at all from contacting the IRS it doesn't make sense to call them just to screw my company.
I haven't discussed anything in detail with my company about what kind of reimbursement I'm hoping to get from them. I'm very valuable in my position so I guess I'm hoping they'll at least give me a small merit raise to shut me up. I'm planning on telling them that I think at least making an attempt to reimburse me is the right thing to do regardless of what they legally have to do. I'm not going to mention the IRS thing because I don't want to sound like I'm blackmailing them. I realize that this situation is not making my company happy but I'm not that concerned about it. I'm good friends with upper management and I doubt they will be concerned unless I bring the IRS into the matter (I might want to look for another job before I decide to take that step).
This is my actual question(s): Has anyone ever been in a similar situation and, if so, what did you do and what happened? Am I missing something obvious as far as what I can do about this? Finally, should I just accept that I screwed up by not acting before the statute of limitations ran out, chalk it up as a lesson learned and drop it?
I work for a relatively large organization (approx. 900 staff) and recently found out I was misclassified as an independent contractor in the past. I stumbled upon an article on an employment blog about the issue of being classified as either a contractor or an employee. I never realized it was such a big issue but apparently it happens a lot and the IRS considers it a serious offense. The article listed 20 items that the IRS considers when make the determination. According to this list, I was not even close to being considered a contractor. I won't bore you with the details, but trust me when I say I was an employee without a doubt according to this list. Also, the exact same position is now classified as an employee.
I openly admit I was an idiot to not bring this up when I was hired, but I can't change the past. I was told they were paying me as a contractor to keep my position "off the books" so my pay would show up as "contracted services" vs. salary in the budget. I was also told that our jobs would be eliminated if the board knew we were technically employees. I honestly didn't care as I just finished school and was desperate for a job.
The main issue to me is unpaid overtime for the many times I worked more than 40 hours a week (sometimes more than 60 hours per week), unpaid vacations, unpaid holidays, unpaid sick days, having to pay my own health insurance and the fact that I paid my employer's share of my income tax. The worst thing is that I didn't participate in my employer's retirement system for those 2 years and, as a result, am not vested yet. I recently turned down a great job because I didn't want to lose my retirement.
I was hired as a contractor 6 years ago and then hired by the same company as a salaried employee 4 years ago. So, I was misclassified for approx. 2 years and that ended approx. 4 years ago. If it matters, there are about 6 other employees in the same situation as myself (except most of them were contractors for 3 or 4 years). In my state's Department of Labor (PA), there is a statute of limitations on things like unpaid overtime of 2 years. I'm not a lawyer but I assume that would greatly limit my options to sue for reimbursement. As for getting paid more money as a contractor (to somehow justify what my company did), they paid me exactly the same as an employee plus giving me the usual benefits. So, I actually made much less as a contractor.
I mentioned this issue to my HR manager (whose a pretty good friend of mine) and, after admitting that she agreed I was misclassified, she said she'd check into it. I asked her for an update today and she said she's waiting to hear back from their attorney. Well, obviously they are going to find out what I already know: that I have no real recourse.
However, there is the issue of the back taxes they owe to the IRS. As I understand it, they are still within the statute of limitations for the taxes. I researched the subject and found that they would most likely be fined heavily in addition. The only thing I can't find through my research is what effect (if any) it would have on me. I can't find any mention of me getting those taxes back. One article I found actually implied that my company wouldn't have to pay the IRS (or pay me back) at all if they could prove I already paid the taxes. If I don't benefit at all from contacting the IRS it doesn't make sense to call them just to screw my company.
I haven't discussed anything in detail with my company about what kind of reimbursement I'm hoping to get from them. I'm very valuable in my position so I guess I'm hoping they'll at least give me a small merit raise to shut me up. I'm planning on telling them that I think at least making an attempt to reimburse me is the right thing to do regardless of what they legally have to do. I'm not going to mention the IRS thing because I don't want to sound like I'm blackmailing them. I realize that this situation is not making my company happy but I'm not that concerned about it. I'm good friends with upper management and I doubt they will be concerned unless I bring the IRS into the matter (I might want to look for another job before I decide to take that step).
This is my actual question(s): Has anyone ever been in a similar situation and, if so, what did you do and what happened? Am I missing something obvious as far as what I can do about this? Finally, should I just accept that I screwed up by not acting before the statute of limitations ran out, chalk it up as a lesson learned and drop it?
This type of thing happens a lot because companies save a ton by misclassifying you. It was worthless to talk to your HR department about it because of course their main objective is to cover their own ass on this, not yours. Do not ask your oppressor if you are oppressed.
You won't get back taxes back for reporting them, but you will get the credit owed to you for social security for those two years, and that could be worth something to you down the line. Did you do self employment taxes for those 2 years? Did you get a 1099 from them?
It is serious business to report to the IRS and the state tax people. They will investigate, you could also report to the labor board, it will wind its way through the system for years and of course you won't have a job for long when they catch wind of it. There is something to be said for making companies that do this pony up, however. They saved thousands by misclassifying you and they weren't paying into your social security, they weren't covering you with even workman's comp, nothing. That might be fine if you were indeed an independent contractor and could claim other expenses on your tax return (tools, travel, etc. depending on the type of work) to offset it. Usually 1099 employees get a higher hourly rate to make up for the added taxes they have to pay and the convenience for the employer not to have to deal with them as a bona fide employee.
I had an employer play fast and loose with my situation once, and because there was such ill will on their part, I did file a case with the labor board and won. I was also told by my tax person that once the state investigates a company, they tend to keep investigating and make their lives a living hell from that point on, and that was fine by me. I filed my case because I was in a position to do so and there were many other older women working for the company who needed that job but they were getting ripped off. They could not afford to rock the boat at that point in their lives, but I was young and I didn't care about rocking the boat so I did. The next time a company tried to call me a 1099 and played fast and loose, I walked. No boat rocking, just quitting. You really have to decide what it means to you to stand on principle or if you'd prefer to keep your job and suck it up. You can report it anonymously to the IRS, but after you already outed yourself to the HR department about your concern, they will most likely guess you dropped the dime.
Good luck with it.
posted by 45moore45 at 8:37 PM on November 6, 2007
You won't get back taxes back for reporting them, but you will get the credit owed to you for social security for those two years, and that could be worth something to you down the line. Did you do self employment taxes for those 2 years? Did you get a 1099 from them?
It is serious business to report to the IRS and the state tax people. They will investigate, you could also report to the labor board, it will wind its way through the system for years and of course you won't have a job for long when they catch wind of it. There is something to be said for making companies that do this pony up, however. They saved thousands by misclassifying you and they weren't paying into your social security, they weren't covering you with even workman's comp, nothing. That might be fine if you were indeed an independent contractor and could claim other expenses on your tax return (tools, travel, etc. depending on the type of work) to offset it. Usually 1099 employees get a higher hourly rate to make up for the added taxes they have to pay and the convenience for the employer not to have to deal with them as a bona fide employee.
I had an employer play fast and loose with my situation once, and because there was such ill will on their part, I did file a case with the labor board and won. I was also told by my tax person that once the state investigates a company, they tend to keep investigating and make their lives a living hell from that point on, and that was fine by me. I filed my case because I was in a position to do so and there were many other older women working for the company who needed that job but they were getting ripped off. They could not afford to rock the boat at that point in their lives, but I was young and I didn't care about rocking the boat so I did. The next time a company tried to call me a 1099 and played fast and loose, I walked. No boat rocking, just quitting. You really have to decide what it means to you to stand on principle or if you'd prefer to keep your job and suck it up. You can report it anonymously to the IRS, but after you already outed yourself to the HR department about your concern, they will most likely guess you dropped the dime.
Good luck with it.
posted by 45moore45 at 8:37 PM on November 6, 2007
Good luck getting any money out of them. I doubt you're going to see anything. You might have some grounds to squeeze them if, when they moved you from a 1099 to a W-2, they kept paying you the same salary. (1099s generally get paid a lot more, since they have to cover their own benefits, e.g. retirement and health.) But they can easily argue that by keeping you at your 1099 pay and making you a W-2, they effectively just gave you a raise.
Also, I'm not sure where you have grounds to go after them. You assumedly entered into a contract with them as a 1099 employee; unless you can prove that they specifically instructed you to do that (and that you didn't set yourself up as a 1099 and then offer your services to them as a contractor), while they may be responsible for fines to the IRS, they probably don't owe you anything. After all, you took them up on their offer.
You probably want to go talk to a tax and employment lawyer before you do anything. You may not want to do anything (sue them, call the IRS, etc.) because there's a possibility the IRS could come after you for fines as well.
Personally I really like working as a 1099, and much prefer it to being a W-2, but I demand a whole lot more cash compensation when working as a contractor than I do as a regular employee. It sounds like you basically underbid yourself, which is a separate issue from them hiring you as a 1099 when you should have been a W-2.
posted by Kadin2048 at 9:36 PM on November 6, 2007
Also, I'm not sure where you have grounds to go after them. You assumedly entered into a contract with them as a 1099 employee; unless you can prove that they specifically instructed you to do that (and that you didn't set yourself up as a 1099 and then offer your services to them as a contractor), while they may be responsible for fines to the IRS, they probably don't owe you anything. After all, you took them up on their offer.
You probably want to go talk to a tax and employment lawyer before you do anything. You may not want to do anything (sue them, call the IRS, etc.) because there's a possibility the IRS could come after you for fines as well.
Personally I really like working as a 1099, and much prefer it to being a W-2, but I demand a whole lot more cash compensation when working as a contractor than I do as a regular employee. It sounds like you basically underbid yourself, which is a separate issue from them hiring you as a 1099 when you should have been a W-2.
posted by Kadin2048 at 9:36 PM on November 6, 2007
You're basically fucked because you are complicit in the miscategorization of your employment/contracting as much as they are.
So, yeah, lesson learned.
posted by blacklite at 12:17 AM on November 7, 2007
So, yeah, lesson learned.
posted by blacklite at 12:17 AM on November 7, 2007
You won't get any money from them but you can convince the IRS that you were in fact an employee to avoid paying as much self employment tax.
posted by itsamonkeytree at 11:10 AM on November 7, 2007
posted by itsamonkeytree at 11:10 AM on November 7, 2007
This happens all the time, as the business wants to save on taxes. They aren't really hurting you here unless you're mad about the social security issue. They're just hurting taxpayers. You're not going to get anything out of fixing this except for a pissed of employer. Anyway, as a contractor aren't you getting paid by the hour? You're probably not getting a 401k or medical insurance, but you should be getting paid more than the regular employees since you're supposed to pay for that on your own... Before talking to an employment lawyer, I'd talk to an accountant and see which option they think is in your best interests.
posted by pwb503 at 11:36 AM on November 7, 2007
posted by pwb503 at 11:36 AM on November 7, 2007
Thanks for everyone's answers. I've done a massive amount of research on this subject so I want to clarify a few things after reading the responses:
1. I did indeed get a 1099 for both years I was classified as a contractor. According to the IRS, this does not make me a contractor. Neither does signing a contract or even knowingly agreeing to be classified as a contractor. The IRS only cares about the duties you performed and whether they meet their definition of a contractor. However, if my company could prove it was an honest mistake they could get some relief as far as the amount they owe. My company would have a hard time proving that because they told me and six of my co-workers that they were intentionally misclassifying us to keep our jobs off the books.
2. As for me being in trouble for agreeing to be classified as a contractor, that is false. If I was incorrectly classified as an employee when I was actually a contractor I would be in deep trouble, at least financially. I would be responsible for back taxes and penalties. In my situation I could be responsible for any deductions I claimed but I didn't really take any because my company paid for everything and I used their equipment. My biggest concern is that the IRS would likely audit me to help make their case and that would be a huge pain. I would also probably need to be issued W-2s for those years and refile.
3. pwb503: I'm afraid I don't agree with your statement that my company isn't really hurting me. I lost tens of thousands of dollars in pay and benefits. Yes, I was paid by the hour but what about overtime? I often worked 60 hours at $30 an hour when I should have worked 20 of those hours at $45 dollars an hour. I paid the full 15% of my income tax when it should have been 7 1/2%. My pay as a contractor was identical to my pay as an employee so I didn't get a huge amount of money to compensate for paying my own taxes and health insurance. I also didn't get paid while on vacation or when I was sick. My company gives full retirement benefits after 30 years but I'll have to work 32 years to collect those same benefits. I'm sure I'll be thrilled when I'm 65 and have to work 2 more years when my co-workers are retiring. Then there are other benefits that are hard to put a value on such as 401K participation and health insurance.
Again, I admit that I share the blame for this situation since I agreed to be classified as a contractor in the first place and then waited so long to try and correct it. I'm just curious to see if I have any additional options available.
posted by bda1972 at 3:36 PM on November 7, 2007
1. I did indeed get a 1099 for both years I was classified as a contractor. According to the IRS, this does not make me a contractor. Neither does signing a contract or even knowingly agreeing to be classified as a contractor. The IRS only cares about the duties you performed and whether they meet their definition of a contractor. However, if my company could prove it was an honest mistake they could get some relief as far as the amount they owe. My company would have a hard time proving that because they told me and six of my co-workers that they were intentionally misclassifying us to keep our jobs off the books.
2. As for me being in trouble for agreeing to be classified as a contractor, that is false. If I was incorrectly classified as an employee when I was actually a contractor I would be in deep trouble, at least financially. I would be responsible for back taxes and penalties. In my situation I could be responsible for any deductions I claimed but I didn't really take any because my company paid for everything and I used their equipment. My biggest concern is that the IRS would likely audit me to help make their case and that would be a huge pain. I would also probably need to be issued W-2s for those years and refile.
3. pwb503: I'm afraid I don't agree with your statement that my company isn't really hurting me. I lost tens of thousands of dollars in pay and benefits. Yes, I was paid by the hour but what about overtime? I often worked 60 hours at $30 an hour when I should have worked 20 of those hours at $45 dollars an hour. I paid the full 15% of my income tax when it should have been 7 1/2%. My pay as a contractor was identical to my pay as an employee so I didn't get a huge amount of money to compensate for paying my own taxes and health insurance. I also didn't get paid while on vacation or when I was sick. My company gives full retirement benefits after 30 years but I'll have to work 32 years to collect those same benefits. I'm sure I'll be thrilled when I'm 65 and have to work 2 more years when my co-workers are retiring. Then there are other benefits that are hard to put a value on such as 401K participation and health insurance.
Again, I admit that I share the blame for this situation since I agreed to be classified as a contractor in the first place and then waited so long to try and correct it. I'm just curious to see if I have any additional options available.
posted by bda1972 at 3:36 PM on November 7, 2007
This thread is closed to new comments.
Also, go see the accountant who did your tax returns in the relevant years. If you did these tax returns yourself, take them to an accountant.
posted by aeschenkarnos at 5:04 PM on November 6, 2007