Legitimacy of regular employee forced to become contract employee.
December 16, 2009 12:10 PM   Subscribe

Legitimacy of regular employee forced to become contract employee.

(please reference my earlier long posting here... http://ask.metafilter.com/139060/Coping-with-a-boss-who-doesnt-care-about-the-business-any-more)

My employer, in a desperate act to save gross receipts taxes as an employer, is forcing me to accept transitioning from being a regular employee to being a contract employee...is this, in fact, legal?
posted by Oireachtac to Work & Money (19 answers total) 1 user marked this as a favorite
 
How do you expect us to answer legal questions without specifying what country / state you're in?
posted by 0xFCAF at 12:13 PM on December 16, 2009


Response by poster: A sincere thank you, 0xFCAF. Call me a yokel.

USA, NM
posted by Oireachtac at 12:16 PM on December 16, 2009


In Virginia it would be 100% legal. Almost happened to me a few years ago.
posted by JoanArkham at 12:20 PM on December 16, 2009


The IRS may not look too kindly on it if you continue to work on a full time basis.

You'll also need to start paying self employment tax and I think you will also lose eligibility for unemployment... I'm spit-balling a bit here. But it's a bit of a raw deal.
posted by rocketpup at 12:24 PM on December 16, 2009


Your employment is at-will. Just like you can quit at any time, your employer can fire you at any time for any non-illegal reason. Unless you had a specific employment contract set up that your employer would be violating, this is entirely legal.
posted by 0xFCAF at 12:24 PM on December 16, 2009


Clarification -- the IRS may go after the employer, not you, assuming you do everything right by them, as a self employed person.
posted by rocketpup at 12:25 PM on December 16, 2009


IANYL, and I don't practice employment law, and this is not legal advice. But if you are an at-will employee (i.e., your contract does not specify a duration of your employment with the employer) AND you are not being penalized for being a member of a protected class (i.e., singled out because you are a minority, woman, have a disability, etc.), I'd be surprised if this were illegal. If she can legally fire you (check with a local employment lawyer), she can most likely give you the option of being fired or staying on as an independent contractor. As noted by a poster above, though, ICs are not just employees who get 1099s. "Independent" means something; see the guides on the IRS website.

Most plaintiff's attorneys will take a case on contingency, and will give you a free consultation. I'd ask around. Good luck.
posted by Admiral Haddock at 12:27 PM on December 16, 2009


If they are changing your classification without changing your job they can't just switch you from W2 to 1099 status. That's pretty much tax evasion on the part of your employer--the IRS has rules about who is an employee and who is a contractor. If they are switching your payroll status but also making you a true contractor (letting you choose your own working hours and conditions, asking you to work on specific tasks rather than 40 hours a week, etc.) that's legitimate.
posted by phoenixy at 12:29 PM on December 16, 2009 [5 favorites]


IANAL, but I am someone who's done a lot of payroll work. If--and this is a big if--your duties are such that you can reasonably be called a contractor, I believe this is legal in the sense that you have basically just been laid off and offered a contract, should you wish you become a contractor. But that's for an employment lawyer to figure out.

This part comes from my experiences doing payroll in NM: Your employer isn't paying GRT because they're an employer, though they are paying FICA and unemployment taxes, so I suppose that'll save them some small amount. If they're small, they probably won't even be saving much on those things. GRT is the taxes they pay on the art sales and other gross receipts.

I'm guessing there's a mix-up there because state withholding is paid on the same form. If your employer is the one using this terminology, be worried. The part that goes on the GRT is actually deducted from your stated wages. If they are not able to pay that part to the state of NM in a timely manner, they may not actually be able to cover your full wages unless they're planning on reducing your pay rate at the same time as they make you a contractor. Right now, your paycheck is only a portion of your actual wages, and if the withholding payments are part of what your employer cannot afford to make, you're in trouble.

I say this because I had clients who got into this trouble. Right now, the check they have to write on payday is Wages - Withholding. If there are big cash problems, they may not currently actually be paying the government the withholding portion. If they can't pay it to the government, they may not be prepared to pay it to you instead.

This is the kind of thing that isn't necessarily a concern with a big company where they're just looking for a more flexible workforce; with a small company who is expressly saying that your payroll taxes are more than they can afford, don't assume they're actually going to be able to pay you as a contractor. You may find yourself working for free until you realize the checks aren't forthcoming.

In other words, even if this is perfectly legal? You're probably looking at the same answer as to your last question, you need to be finding a new job.
posted by larkspur at 12:31 PM on December 16, 2009 [1 favorite]


I just looked at the IRS website and it sounds like even if your employer wants to call you a contractor, by definition, you are likely an employee. See the definitions here for independent contractor and here for employee. If you're going to be an independent contractor, it sounds like you have the freedom to decide just what sort of work you're willing to do and when (but your employer doesn't necessarily have to continue your contract if she doesn't like what's in it.) If you're going to be a contractor, you should think about what you want that contract to look like.
posted by omphale27 at 12:46 PM on December 16, 2009


Response by poster: Larkspur, the way this was presented to me was that I would be earning my full gross income, including what would normally be deducted, so I believe you are correct in guessing my employer would be saving FICA, unemployment tax, etc.
posted by Oireachtac at 12:57 PM on December 16, 2009


You stand to lose thousands of dollars in extra taxes as a result of this transition; I strongly suggest you spend a couple hundred dollars to speak to an attorney that specializes in employment law in your area. The laws concerning employment can be complicated; it's possible that your employer doesn't have the right to move you to a contract position.
posted by helios at 2:00 PM on December 16, 2009 [1 favorite]


If you are self employed, you will have to pay FICA to the IRS st a higher rate than was deducted from your earnnings as an employee.You will probably lose any health and life insurance your employer was paying, though you will be eligible to convert the health insurance to self-pay via COBRA, which can be pretty expensive.You might want to negotiate a higher pay rate if these changes have a major effect. Are they planning to use your services full-time? If not, are your skills such that you could sign up other clients to make up the difference? Just some stuff to keep in mind.
posted by path at 2:03 PM on December 16, 2009


Having worked as a contract employee I'd like to emphasize the part about getting an accountant and figuring out what to do about your taxes.

I was stupid. I didn't. I let the situation drag on for 4 years. I've got an aversion to doing paperwork, which as I mentioned earlier is stupid to an insane degree.

I currently owe the IRS around $10,000. After I ended my time as a contract employee I did eventually drag myself to the IRS office, throw myself on their dubious mercy and set up a payment plan. Basically I will be paying them around $100 a month for the rest of my life, or if I get into a better financial situation I can pay more and actually pay off the debt, and any tax refund I get goes to paying off the $10,000.

I urge you to learn from my bad example. Hire an accountant, figure out what you will need to pay in taxes, and put that away in a place you can't spend it no matter what.
posted by sotonohito at 2:14 PM on December 16, 2009


Talk to an attorney and to your state's labor board. What your employer is doing could fall anywhere from "totally kosher" to "insanely illegal" on the spectrum based on what your job actually entails and what the laws in your state are. It's worth the lawyer money.
posted by Doublewhiskeycokenoice at 3:41 PM on December 16, 2009


I'm going to go with the advice you got back in November: flee this sinking ship.
posted by ook at 7:38 PM on December 16, 2009


If you are a contractor, you should determine your pay rate, not her. Charge her a higher rate. This way you could cover any extra taxes you might need to account for.

And also .. keep looking for another job.
posted by duckus at 8:02 PM on December 16, 2009


Yeah, there are rules about the contractor versus employee role. I forget what they are, but just like the exempt versus non exempt thing, you and your employer can call it anything you like, but if the nature of the work is such that it fits one legal definition or another, then it is what it is.

Also, even if you are paid the top-line gross as a 1099 employee, you lose money. The employer is responsible for half of the SS tax and other smaller taxes, like headcount taxes and unemployment taxes. So you need to be paid ~10% more just to break even.
posted by gjc at 7:50 AM on December 17, 2009


While the employer can probably just terminate you as long as the termination is not for an illegal reason (discriminatory, retaliatory, etc), the employer can't legally just *poof* deem someone an independent contractor. (Plenty of them actually do this, but it isn't legal).

If you worked under this new arrangement but were otherwise effectively an employee (used the employer's equipment, kept a set schedule, couldn't work for anyone else, couldn't hire a subcontractor to do your own work, were controlled by the employer, etc etc), you will remain an employee for the purposes of payroll taxes (IRS), wage and hour/overtime laws (Department of Labor), anti-discrimination laws (EEOC) and the myriad of other federal and state agencies that exercise some control over the employer/employee relationship. If there was a complaint filed with these agencies, they may very well find that you were an employee regardless of the classification

So, in short, it probably isn't legitimate. On the other hand, if the employer simply has the right to fire you, that may be the path taken if you don't agree to the change. Sounds like a bad situation to me. Also, you will get killed on your taxes if you are a 1099, as you'll have to pay all of the FICA taxes, some of which are otherwise paid by an employer. Get out if you can.
posted by seventyfour at 11:15 AM on December 17, 2009


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