Gray area is getting grayer.
March 16, 2010 3:34 PM   Subscribe

Am I an employee or a contractor?

I work full-time for a small start-up company but am paid as a 1099 contractor. When I got the job two years ago, I signed a contract that called me an independent contractor. In fact, the contract states: This is not an offer of employment with the Company and does not bestow employee rights on the Contractor.

I go to the company's office and use their computer to work. After a year, I expected a raise, but was told that the company was still struggling financially. Instead of more money, I negotiated two days of work from home, and a nice title on my business card.

Another year has passed with no raise. Now, however, the owner has created a sick day and vacation day policy. For example, vacations lasting more than a week require six months notice, while hours lost due to things like doctor appointments must now be made up elsewhere in the week. The balance to this is that the boss is now offering paid vacation time if the notice requirements are met.

I've looked into this, and it seems contrary to my status as an independent contractor. It seems that the boss wants all the benefits of a freelance contractor -- mostly, not paying taxes -- but also wants the benefits of a W-2 employee, who would follow a policy for time off.

I'm beginning to think this whole set-up is illegal, but I'm not sure if I'm also to blame by letting this situation continue. Being expected to work on-site 35 hours a week as a 1099 was a red flag, according to just about everyone I've talked to. So I guess my questions are: Is this legal? Is it OK to be a 1099 and be expected to follow a sick/vacation time procedure? Should I even be a 1099 at this point? And can I address these issues without danger of losing my job?

I should add that everyone else at the company is a 1099. Half of the employees are part-time and some don't even have contracts -- just handshake deals.

Throwaway email for follow-up questions is Thanks.
posted by anonymous to Work & Money (20 answers total) 2 users marked this as a favorite
You should call your state department of labor. State DoLs are starting to take this stuff very seriously because it means a lot of lost state taxes.
You are not to blame (legally), the employer is responsible for classifying you correctly. Here's the IRS page with information on determining your status. The IRS page tells you how to file your taxes if you believe you have been misclassified.
posted by cushie at 3:37 PM on March 16, 2010 [1 favorite]

To answer your, no, no, and no. You're an employee and your employer is trying to avoid paying taxes. I believe the IRS will frown on this situation.
posted by MsKim at 3:37 PM on March 16, 2010 [2 favorites]

You can file an SS-8 (link goes to pdf) to have the IRS determine it, but from what I have read, that:
1) takes a long time
2) can potentially get the company in trouble (I think; I read this on some page that google turned up, so I don't know the quality of that information)
posted by needs more cowbell at 3:41 PM on March 16, 2010

Employment lawyer here. This is too complex to be answered without a real consultation.
posted by Ironmouth at 3:58 PM on March 16, 2010 [1 favorite]

Not as gray an area as you think, but you do need to talk to a pro about it. They do free consults like other lawyers.
posted by rhizome at 4:17 PM on March 16, 2010

While I'm not a lawyer or competent to comment on the legalities of your situation, I will observe in a general way that there are companies out there that try to skirt withholding taxes through exactly this kind of situation, and that the IRS takes an extremely dim view of it.

I am a freelancer, and to do business with one company I had to provide them with extensive documentation confirming my freelance contractor status so that they could immunize themselves against any possible suspicion from the IRS.
posted by adamrice at 4:44 PM on March 16, 2010

The real question is how to you feel about the arrangement. If you are happy with the terms and think they are fair, then you can keep your mouth shut, collect your earnings, pay your taxes as required and face no legal jeopardy. The only entity at possible risk is the company.

On the other hand, if you don't like the arrangement, you can complain to your employer and if they don't fix the problem, report them to the IRS. If you do this it is possible that the company may fold and you all may lose your jobs.

There is some grayness in the employee vs. contractor discussion. You should be aware of what you want to accomplish and the possible the consequences.
posted by JackFlash at 4:49 PM on March 16, 2010

Assuming you live in the United States, this sounds pretty cut and dried. You are an employee, your employer is breaking the law, and your employer may be liable for significant penalties.

It's up to you what you do about this. You could go along and get along and not worry about it, you could bust his ass, or you could perhaps try to negotiate a smooth transition to employee status with appropriate consideration (i.e. back pay). Regardless of which of these courses you choose, you should contact an attorney.
posted by alms at 4:56 PM on March 16, 2010

By the way, this has nothing to do with how long you've been working at the place. Based on what you've said, you should have been an employee from day 1.
posted by alms at 5:03 PM on March 16, 2010

Perhaps you need a lawyer, but the IRS guidelines are pretty clear. The IRS used to have a very handy 20-point checklist. I can't find it on their website at the moment, so here it is. Look over the 20 points and see if you fit their definition:
1. Instructions. An employee must comply with instructions about when, where, and how to work. Even if no instructions are given, the control factor is present if the employer has the right to control how the work results are achieved.

2. Training. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services.

3. Integration. An employee's services are usually integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control.

4. Services rendered personally. An employee renders services personally. This shows that the employer is interested in the methods as well as the results.

5. Hiring assistants. An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire, supervise, and pay assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.

6. Continuing relationship. An employee generally has a continuing relationship with an employer. A continuing relationship may exist even if work is performed at recurring although irregular intervals.

7. Set hours of work. An employee usually has set hours of work established by an employer. An independent contractor generally can set his or her own work hours.

8. Full-time required. An employee may be required to work or be available full-time. This indicates control by the employer. An independent contractor can work when and for whom he or she chooses.

9. Work done on premises. An employee usually works on the premises of an employer, or works on a route or at a location designated by an employer.

10. Order or sequence set. An employee may be required to perform services in the order or sequence set by an employer. This shows that the employee is subject to direction and control.

11. Reports. An employee may be required to submit reports to an employer. This shows that the employer maintains a degree of control.

12. Payments. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job or on straight commission.

13. Expenses. An employee's business and travel expenses are generally paid by an employer. This shows that the employee is subject to regulation and control.

14. Tools and materials. An employee is normally furnished significant tools, materials, and other equipment by an employer.

15. Investment. An independent contractor has a significant investment in the facilities he or she uses in performing services for someone else.

16. Profit or loss. An independent contractor can make a profit or suffer a loss.

17. Works for more than one person or firm. An independent contractor is generally free to provide his or her services to two or more unrelated persons or firms at the same time.

18. Offers services to general public. An independent contractor makes his or her services available to the general public.

19. Right to fire. An employee can be fired by an employer. An independent contractor cannot be fire so long as he or she produces a result that meets the specifications of the contract.

20. Right to quit. An employee can quit his or her job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion, or is legally obligated to make good for failure to complete it.
I think you should be worried about your income taxes and an audit. Did you receive a W2 to do your taxes? Does the company pay both halves of your FICA? Are you paying estimated taxes quarterly?
posted by Houstonian at 5:20 PM on March 16, 2010 [10 favorites]

It seems that the boss wants all the benefits of a freelance contractor -- mostly, not paying taxes -- but also wants the benefits of a W-2 employee, who would follow a policy for time off.

You are probably correct, and if so, the IRS would like to hear about it.

I am a long-time contractor (and IANAL), who has spoken with labor lawyers at various times. You sound like you are probably a misclassified employee (i.e. you should be getting a W2 not a 1099, and your employer should be paying payroll taxes and you shouldn't be paying self-employment taxes). The big red flags to me are:

1. You exclusively use company equipment to do your job. Contractors generally provide their own tools.
2. Your boss controls your schedule, and in particular, limits your time off and/or vacation. Contractors generally set their own hours, and don't get paid for vacation days.
3. You have a title, given to you by your client/employer, and a business card that suggests to your client's other vendors that you're an employee. Contractors are independent businesses, set their own titles, and can't generally pretend to be speaking for their client.
4. You work full time, year after year, for one employer/client. This is more of a yellow flag, but most Contractors handle multiple assignments/clients. If your contract explicitly prevents you from working for other clients, then it's a huge red flag.
5. You had to negotiate work-from-home time. Generally, Contractors have control over the venue and hours in which their work is performed. This also is a yellow flag, because some work obviously must be done on-site during regular hours. Without knowing the nature of your work, this one's a little tenuous.

1099/W2 classification can be grey, but from what you've stated, it doesn't sound like they're treating you correctly (and yes, that's illegal). Of course, you need to talk to a local lawyer, not only to find out what to do next, but to learn what your employer/client is allowed to do to you in retaliation for dropping a dime... then decide what you want to do about it.

Assuming you've been paying your taxes on your 1099 earnings, you're not the one that's potentially in trouble, here... your client/employer is. But, you could very easily find yourself out of a job/contract in many states.
posted by toxic at 5:51 PM on March 16, 2010

I saw EXACTLY this situation in a place I used to work. What this company is doing is not right. You're on a 1099, but they require you to work on-site, and they dictate your hours? Nope, they're breaking the law here.

In the situation that I observed, the company did this with a large number of people. When all those 1099'd employees were laid off at the end of the project, they filed for unemployment. Many of them were fresh out of school and didn't know that because they were being paid on a 1099, they were not eligible for unemployment. When the Dept. of Labor started getting all these ineligible unemployment applicants from the same company, they realized something was up. They fined the company in question 5 million dollars (at least, that was the sum that the rumor mill spread around.)

Go to the Dept. of Labor, and maybe look for a new job. A company that is in the weeds deeply enough to pull this kind of thing is on treacherous ground.
posted by cleverevans at 6:29 PM on March 16, 2010

You don't need a lawyer in this situation.

Effectively, you are an employee. It's important to remember that the IRS decides who is an employee and who is a contractor, and Houstonian is correct above in pointing out that the IRS has made it pretty clear that, in your situation, you are an employee.

This is a sticky situation, but after struggling with it myself I'd advise that you do the following things:

Print out form SS-8 and go to your boss and tell him that you've been looking at your taxes this year and realized that you're misclassified as an independent contractor. It's always touchy confronting your employer with this kind of thing, but the fact is that you've been treated as an employee and you need to be taxed as one. He might get insistent or upset, but just stay calm and point out to him that your accountant has advised you to fill out form SS-8 to ask the IRS to make a decision regarding your designation. You may also calmly point out that, if you fill out that SS-8, it could be a retroactive decision, in which case he'd be liable for all past taxes during all the years you've worked for him. That would be painful for him, I'm sure. The other option is just to start filing you as an employee, and not worry about asking for a designation from the IRS.

What else you do is up to you. It sounds distinctly like your boss is bad at dealing with taxes and with finances in general. That's not something I would want to deal with, although there have been times in my life when it's been preferable to being unemployed. You may wish to inform your fellow employees of the fact that they seem to be employees, not contractors, and that they have every right to file an SS-8 as well. Then again, you might want to avoid rocking the boat. It's really up to you, to be honest, but keep in mind that a company run by someone who doesn't do taxes very well doesn't seem like a good bet for the future.
posted by koeselitz at 7:22 PM on March 16, 2010

I know someone who went through this experience last month (was 1099'd when he should have been W-2'd, took it through proper channels, and won judgment and money). He's a smart guy who sunk a good amount of time into the project. He also severed his ties with his previous employer and caused the employer to be in danger of bankruptcy (the IRS discovered several other creative accounting issues).

You have two things to think about here, in my opinion: first, do you want to go after your employer for the taxes that might (if you are misclassified) owed to you and the IRS and other interested parties? This could mean losing your job and causing others to lose theirs; it's also possible that another employee could blow the whistle and you'd still lose your job. You could also lack sufficient evidence (I am neither lawyer nor accountant, fyi, so this is neither legal nor tax advice) to make a successful case as per IRS rules, etc.

The second issue is this: if you go after your employer, do you need to use a lawyer? I would argue that while it could be done without one, you might feel more comfortable with one doing the work for you. If you do choose to go the lawyer route, I think the National Employment Lawyers Association has been recommended here before if you need a referral (there's a big 'Find a lawyer' box on the left hand side).

Whatever you do, I would expect to need to dust out your resume. Employers who might be cheating the IRS wouldn't hesitate to cheat you.
posted by librarylis at 8:38 PM on March 16, 2010

Several people have said things that sound, to me, like this: You can turn your employer in, but then he will be in trouble/bankrupt. Although it's true that the poster's ignorance of the law is not an excuse, I would argue that it's not the poster who would cause trouble or bankruptcy. It is the employer who already has caused this problem. As a result, both of them have tax problems.

Anonymous, tax problems are not something you want. They never go away, and they are expensive.
posted by Houstonian at 2:24 AM on March 17, 2010 [1 favorite]

Houstonian and others are exactly right that is doesn't matter what your contract says; the gubbmint is the one who sets the rules on who's a contractor and who isn't.

So talk to a lawyer.
posted by Aizkolari at 5:26 AM on March 17, 2010

My husband was in this exact situation a few years ago, right down to the company providing his business cards. (We are in Canada.) When it was investigated (instigated by others), he was questioned along the lines Houtonian lays out above, and the investigator finally commented "So, I guess you don't have a lot of tax write-offs then." He replied, "No, I have none." That's about the only place he (or the OP) could get into legal trouble. Claiming business expenses that aren't really valid.
posted by ThatCanadianGirl at 6:51 AM on March 17, 2010

That's about the only place he (or the OP) could get into legal trouble. Claiming business expenses that aren't really valid.

The situation in the US is quite different. If the OP has been paying self-employment practices properly, then he's not at risk. But his employer could be in serious financial trouble for breaking the law in this way.
posted by alms at 4:30 PM on March 17, 2010

Also, for what it's worth, it'll probably be a lot more helpful to talk to an accountant than a lawyer in this case. Tax law actually isn't; in the US, taxes are somewhat unique in that they're governed by a code. An accountant will be able to help you determine what your designation should be, whether it's worth it to go after changing your designation retroactively (i e getting taxes back for all the years during which you've effectively been an employee) and what you should do in general.

One important note that I recently learned: you may not see this as part of your future potentially, but as a contractor you will almost certainly not be eligible for unemployment should you lose your job. So it's a good idea to get this straightened out.
posted by koeselitz at 4:50 PM on March 17, 2010

Sorry alms, I wasn't clear. I meant that's the only place my husband or the OP could be in legal trouble. Yeah, the employer could be in a heap of trouble, in either country.
posted by ThatCanadianGirl at 5:24 PM on March 17, 2010

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