Treating an Employee as an Independent Contractor—the Bad and the Ugly

A lot of hiring situations in horse businesses are casual, or at least they’re treated casually.  Friendly Farm needs horses fed.  Kat is happy to take the job feeding them for $12 per hour.  At the end of the first week, she reports having worked 20 hours, and the farm owner cuts her a check for $240.

If the farm owner read last week’s blog, she knows that Kat is legally an employee.  But she’s heard that having employees is expensive—there’s payroll taxes, unemployment taxes, worker’s comp insurance, reports to file, and all sorts of rules to comply with.  Since Kat’s happy just getting a check, she figures she’s saving a good bit of money.  And she is…..for the moment.

What can go wrong? 

  • Kat gets seriously hurt on the job, and goes to an urgent care or emergency room for treatment. She answers ‘yes’ when the triage nurse asks if this injury happened at work.   When the facility goes to make a claim with her employer’s Work Comp policy, they discover there isn’t one—and are required to report that to the state.
  • The resident trainer leaves, taking half the boarders with her. The owner decides to do the feeding herself until income recovers, and tells Kat she’s sorry but has to lay her off.  Kat files for unemployment benefits to tide her over while she looks for a new job. The state Employment Commission has no record of Friendly Farm paying Unemployment Taxes, and opens an investigation of the case.
  • Kat turns out to be unreliable or not a careful worker, and the farm owner terminates her. Kat complains bitterly to her friends, one of whom suggests that she “get even” by filing a complaint with the labor board.  The labor board opens an investigation into her claims of wage and hour violations, and failure to pay employment taxes on her behalf.
  • In January Friendly Farm issues Kat a Form 1099Misc, reporting “non-employee compensation” for the money she earned last year. Unsure what to do with it, Kat consults her uncle, a tax accountant.  He explains self-employment taxes, and gives Kat an estimate of her liability—an amount that causes her to panic.  Upon further questioning, her uncle explains that she is a misclassified employee and offers to help her file a claim to recover the taxes that Friendly Farm should have paid on her behalf.

What’s next for Friendly Farm?  

  • Hiring lawyers.
  • Fines for violation of state worker’s compensation insurance laws and liability for unpaid workers’ compensation premiums.
  • A bill for back-dated unemployment insurance premiums, and nonpayment penalties.
  • Fines for failing to have I-9 immigration status verification.
  • Fines for violation of the Fair Labor Standards Act.
  • A bill for back taxes—FICA, Medicare, Federal Unemployment, State Unemployment, and wage withholding, plus substantial penalties.
  • Possible criminal prosecution of the farm owner.

I know a lady whose business was very much like Friendly Farm, and ended up with scenario #3 above.  It cost her over $10,000, and a six-month disruption of her business that very nearly put her out of business.

If you’re ready to get out of the misclassified worker trap, schedule a free consultation to get more information on our range of payroll service offerings.

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