How does re-categorizing independent contractors work?
April 15, 2011 7:58 PM   Subscribe

My wife is looking into reporting her boss for miscategorizing her as an independent contractor. I'm quite sure she has been; her boss has even referred to the staff repeatedly as employees. (In materials we have saved.) We're looking for an employment attorney right now, but I've just got a couple preliminary questions to understand how this works.

She's worked at this place for more than five years, longer than we've been together. Every aspect of her day is controlled by the employer, except that she has on rare occasions paid for some of her own materials. I've been telling her I thought this was a problem for awhile, but we had other things we were worrying about, mostly.

So, all in abstracts because you are not our lawyer, etc:

1. If someone is found to be an employee instead of a contractor, can they potentially file amended returns and get part of their SE tax back for the whole time they were supposedly a contractor? Or do the lose some portion of it for not having reported earlier?

2. Given the whole at-will thing, can an employee who reports their employer for this get fired for doing so? Would they become eligible for unemployment immediately upon being re-categorized as an employee? It's my general understanding that independent contractors aren't eligible.

Basically, we're trying to get a feel for the generality of whether there's a possibility of getting money back in amended taxes in order to make up for the risk of losing that income and whatever we might have to pay a lawyer, because right now we're still living very paycheck-to-paycheck. Not that we don't want to do the right thing, of course, but I just don't want us to get hurt more by having done this than by not.

Any other advice from people who've been through this is welcome. Thanks for the help.
posted by anonymous to Work & Money (9 answers total) 3 users marked this as a favorite
No one can tell you the answer to this question, especially since you haven't told us what jurisdiction you're in. You need to speak to a lawyer. You can get a free consultation with an employment lawyer licensed in your jurisdiction, who will tell you how best to proceed and how much, if at all, this is likely to cost you.
posted by decathecting at 8:08 PM on April 15, 2011 [1 favorite]

If you need her job tread carefully. In fact what I would recommend (aside from the very wise advice of talking to a lawyer) is that she get another job and THEN report this. You do realize that if she is found to be an employee this will cost the employer a good chunk of change, right? If there is any way they can retaliate they will.
posted by St. Alia of the Bunnies at 8:18 PM on April 15, 2011

(This entire answer assumes you are in the USA. Sorry if that's not the case.)

Noting that I am not a lawyer, or your lawyer, and hypothetically and abstractly speaking, whether you will recover enough in back SE taxes to make it worth your while is up for debate.

For IRS individual taxes, the important thing to keep in mind is that there is a statute of limitations for claiming refunds -- they can only be claimed the later of: three (3) years from the due date of your return, or the extended due date if you filed for an extension; or, two (2) years from the date you actually paid the tax.

Assuming that your wife has never asked for an extension of time to file, and assuming she paid her taxes on time (on/before the due date), the earliest year she could get a refund for would be 2008. So you've got 2008, 2009, and now 2010 taxes where refunds are a possibility.

If you feel it's worth your while, your wife would need to file Form SS-8 with the IRS to get an official determination of whether she is an employee or independent contractor. They must give the company a chance to respond, so there is no way to do this quietly. If the determination comes back that she is an employee, then she'd complete and attach Form 8919 to the amended returns.

It can be a long process: this IRS page says determinations can take at least six months. Smaller possibility of it being done sooner, larger possibility of it taking longer.

Best wishes, whatever you two wind up deciding.
posted by texano at 9:05 PM on April 15, 2011

i'm a little confused. why have you started to suspect that the employer has been miscategorizing your wife's employment status. maybe i am oversimplifying, but what statement have you been getting from him for the past five years: a W2 or a 1099?
posted by violetk at 9:25 PM on April 15, 2011 [1 favorite]

1. ?

2. She might get fired; if she was illegally classified as a contractor (sounds like it to me), then she might have grounds for wrongful dismissal, and*might* find that suing for damages is worth more than legal fees.

At least in the state I'm in, Oregon, unemployment is paid for through taxes on the employers. i.e., she might not have any money paid into the system for her.

Conversely, however, it sounds like if her status is found by the state to be an employee rather than an independent contractor, that it would be very costly to her old employer.
Oregon's views on misclassification of employees: the fines are bad enough if you're a naughty employer by accident, but if they actually find you guilty of fraud, an extra 50% in fines get lumped on.

I doubt most other states/provinces in North America would be much different: regardless of the trend of gleefully gutting labor laws, payroll taxes on employees are a rather vital source of income that no government is willingly going to give up.

I would say that unless her boss is actually spiteful, there's a pretty good case to be made to him that compliance with the law will be much less expensive than knowing noncompliance.
posted by ivan ivanych samovar at 10:11 PM on April 15, 2011

Of course I HAVE no EXPERIENCE in this situation. If I found myself so positioned, there are a few things I'd want to think about, namely how much I enjoyed my job and whom I worked with; and whether or not my hourly rate reflected the extra burden of being a contractor/self-employed.

If she does not enjoy her job or the organization she works for, by all means proceed with an employment lawyer. If things are not so cut and dry, then perhaps a cost/benefit chart is in order?
posted by smirkette at 11:32 PM on April 15, 2011

posted by jon1270 at 2:49 AM on April 16, 2011

Your state Department of Labor probably has some kind of hotline/information where you can call and ask questions, as well as file a complaint. For example, you can get in touch with the NY DoL here, and report misclassification anonymously if you prefer.
posted by cushie at 1:40 PM on April 16, 2011

Note that the IRS and state Departments of Labor tend to frown on employers pretending that people are contractors. The most common situation is that a person is indeed an "independent contractor", getting 1099's, the whole route - except that they report to work, particularly with a schedule and workspace.

Some employers do this to avoid payroll taxes, worker's compensation, insurance liabilities, etc. However, the IRS will call them employees, and go after back taxes owed. You'd need to talk to a lawyer, though of course checking with the IRS or your state Labor Department web site, I'd be surprised if they didn't have information on this.

IRS website link

Note that if she is an independent contractor, she could be on the hook for "self-employment tax".

Also remember that employers really, really need to toe the line when it comes to the employee/contractor definition. Some employers have legitimately used contractors to do work, then get surprised when the contractor tries to scam them for worker's compensation, or getting into a pissing contest about wrongful termination.
posted by Xoebe at 1:45 PM on April 18, 2011 [1 favorite]

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