This fact sheet will cover a range of issues surrounding the misclassification of employees as independent contractors, including legal definitions of independent contractors the reasons why an employer would misclassify an employee as an independent contractor the extent of misclassification the costs and consequences of employee misclassification and what states and the federal government are doing to combat misclassification.Īn independent contractor provides a good or service to another individual or business, often under the terms of a contract that dictates the work outcome, but the contractor retains control over how they provide the good or service.
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Misclassification also causes federal, state, and local governments to suffer revenue losses as employers circumvent their tax obligations. Misclassified employees lose workplace protections, including the right to join a union face an increased tax burden receive no overtime pay and are often ineligible for unemployment insurance and disability compensation. While the definition of misclassification is a function of a complex set of statutes and policies set forth by federal and state agencies, the effect on employees is straightforward. The distinction between genuine independent contractors and employees misclassified as independent contractors, while complicated, is a crucial matter. While some employers misclassify their workers as independent contractors in error, often employers misclassify their employees intentionally in order to reduce labor costs and avoid paying state and federal taxes.
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The Internal Revenue Service (IRS) estimates that employers have misclassified millions of workers nationally as independent contractors. Employer misclassification of their employees as independent contractors is a widespread phenomenon in the United States.