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Not sure if your workers are employees or independent contractors? If not, your company could be at risk.

In light of a recent federal and even more recent state government crackdowns on the misclassifying of employees as independent contractors, now might be a good time to revisit your worker classification decisions to ensure your company doesn’t get caught up in a lawsuit.

In addition to imposing new misclassification penalties, many states (Wisconsin included) have altered the process by which employers test whether or not a worker is, in fact, an employee. Unfortunately, this makes an already complicated classification process even more difficult.

The Internal Revenue Code requires employers to provide certain benefits to employees but not to independent contractors, which some employers have taken unlawful advantage of in recent years, knowingly or not. To avoid a classification lawsuit, the IRS requires employers to evaluate workers on three levels:

  1. Behavioral: Does your company hold the right to determine how the worker does his or her job?
  2. Financial: Are business expenses like supplies and reimbursements the responsibility of the company? Is the worker paid regularly?
  3. Type of relationship: Is there an employee-signed benefits package? Is the relationship continual?

In addition to the IRS test and other federal considerations (like the Fair Labor Standards Act), the state of Wisconsin changed its legal definition of independent contractor starting in 2011. The most notable change is that a worker can only be considered an independent contractor if he or she performs duties totally independent of the employers control and direction. The state also added a requirement that a worker must meet at least six specific conditions to be considered an independent contractor. These qualifications must be laid out in a signed contract.

If you think you may be improperly classifying employees as independent contractors, you may be at risk for a state investigation, federal investigation or and even more costly class-action lawsuit.

Need help with employee classification? Consider upgrading your CFO function with our experienced financial services and accounting team or let us know in the comments section below.

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