(Updated from original post on 04/04/2016):
Notice that I said workers, not employees. I know you have been reading the articles online and in entrepreneur magazines that imply (if not directly tell) you should always hire independent contractors, interns, and volunteers before you hire employees to build your business. I read them, too. I hear the start-up founders talk about the ways they “saved money” by hiring “freelancers”, sometimes in response to advice given by their accountants or other trusted advisors.
Yet I also hear the panicked small business owner who has called me after receiving a penalty notice from the New York State (“NYS”) Workers Compensation Board (“WCB”). We’re not talking about $100.00, or even $1,000.00. It’s usually $30,000.00 or more.
It’s absolutely imperative that you know the following before you hire the first non-owner to work in your business:
- The Internal Revenue Service (“IRS”), Department of Labor (“DOL”), and WCB consider slightly different criteria to determine who is an independent contractor, versus an employee. You can’t contract around these, and the penalties can be severe, especially if you have failed to secure workers compensation insurance to cover work-related injuries of workers the WCB determines are your employees.
- Officers of a corporation can be held personally liable for employee wages and penalties for failure to provide workers compensation insurance. You might have spent a lot of money setting up a separate entity to insulate your personal assets from liability for injuries to people or their property that arise from your business operations, but their are certain situations in which government agencies and the courts can “pierce the corporate veil”. They can still attach your personal bank accounts and other assets when that is the most equitable action to take.
- Your business bank accounts can be frozen, if you have failed to provide workers compensation insurance and respond to a judgment regarding this failure. The NYS WCB doesn’t like to be ignored, and as a future successful business owner, you don’t want to resolve any of the many conflicts that will arise in your operations.
- If you are working on a government project, you could be served with a Stop Work Order and prohibited from continuing until you resolve issues with your workers compensation insurance. This can, of course, stop your cash flow, put your employees out of work, and cause you to miss contractual deadlines.
- It is often cheaper to pay for workers compensation insurance than to pay a penalty for non-compliance. Penalties for failure to insure your employees under the workers compensation law accumulate at a rate of $2,000.00 for every 10-day period that you do not have the required coverage. For one employee, that’s $6,000.00 per month.
- It’s not just penalties from the WCB that could arise. In addition to those penalties, you could be responsible for the cost of a workers compensation claim filed against your business during a period in which you did not have coverage. Independent contractors, interns, freelancers, vendors, and volunteers have also been known to file Unemployment Insurance claims and cause audits that result in DOL penalties, which often lead to IRS and NYS tax penalties, if not also Wage and Hour claims.
I understand that you like the numbers you see when you calculate the purported savings of hiring an allegedly independent worker, but re-do your math considering the above variable costs. Do the cost-benefit analysis, and discuss your hiring in detail with an attorney and an accountant.
This post is a general overview of the potential legal implications of worker misclassification. It is not legal advice, and there is certainly no guarantee that any of the actions detailed above will generate a similar or specific result. Past success is never a guarantee of a future outcome. If you require information or advice applied to your unique situation, please make an appointment to discuss it with an attorney. Don’t rely solely on what you read on the Internet.
Concerned you’ve misclassified employees?
Nance L. Schick, Esq. is an employment attorney, ethno-religious mediator, conflict resolution coach, and diversity trainer in New York City. Her goal is to keep employers out of court and build their conflict resolution skills so everyone has a better work experience. She is creator of the Third Ear Conflict Resolution process, author of DIY Conflict Resolution: Seven Choices and Five Actions of a Master, and an award-winning entrepreneur, who has been acknowledged by Super Lawyers (ADR, 2018, 2019 & 2020), the U.S. Chamber of Commerce (2015 Blue Ribbon Small Business), Enterprising Women Magazine (Honorable Mention, 2014 Woman of the Year awards), and more.