Some employers will refer to a segment of their workforce as a “1099 employee” and while many use the term to distinguish independent contractors from the company’s W-2 employees, this term does not exist from a legal standpoint.
In fact, in addition to being inaccurate, this term is hazardous and could be costly for companies. One of the most common mistakes employers make is misclassifying its workers as independent contractors and this issue is only exacerbated by erroneous terms such as “1099 employee.” Though it may seem to many that calling workers “1099 employees” is merely a use of inexact terminology, it should be noted that this lack of precision could lead to problems, such as failure to withhold and pay taxes, operating without proper insurance, and potentially triggering a DOL audit.
A “1099 employee” is a misnomer employers use to describe independent contractors. A 1099 refers to the tax form companies must provide to independent contractors for work performed throughout the year. Business taxpayers must report nonemployee compensation of $600 or more to the IRS using a Form 1099-NEC.
What You Need to Know About Independent Contractors (ICs)
ICs are:
- not protected by Equal Employment Opportunity laws or other employee protections such as minimum wage, overtime pay, workers’ compensation, or unemployment compensation laws and regulations
- not eligible for employer sponsored benefits
- required to self-report all earnings and employers do not withhold taxes and payroll deductions
Employers should not exercise control over an Independent Contractor such as:
- Control or monitor the way an Independent Contractor works, meaning, they cannot tell them what time to report to work or supervise the aspects of the work performed
- Requiring the IC to attend meetings or are given handbooks and policy manuals
- Give an IC an email address, business cards, stationary or tools to do facilitate the job
- Provide benefits
- Pay a contractor on a weekly, bi-weekly or monthly basis. IC’s should submit invoices and are paid with other vendors
- Provide ICs with W-2s
The distinction between independent contractors and employees is a complex determination that employers must make regarding each worker. There is no single test to evaluate a worker’s status as an independent contractor or an employee for all purposes, which further complicates the issue. The decision of whether workers are considered independent contractors or employees is assessed by federal courts through a list of factors, each of which has various issues that require further analysis, commonly known as the “Economic Realities Test.” The cornerstone of the factors is the employer’s right to control the performance of the worker as they complete the task assigned. The six factors utilized by courts are:
- The degree of control that the employer has over the manner in which the work is performed and by whom;
- The worker’s opportunities for profit or loss depends on the worker’s managerial skill;
- The employer’s and worker’s relative investment in equipment or material;
- The degree of skill and/or independent business judgment required for the work;
- The permanency of the working relationship; and,
- The degree to which the services rendered are an integral part of the employer’s business.
Although this test was scheduled to be published and expressly adopted by the DOL, the final rule taking such action was withdrawn prior to taking effect. In addition to the complication of the test and the fact that the DOL has not further addressed the issue, the misnomer “1099 employee” completely misses the objective. The ultimate determination is whether a worker should be classified as an employee or an independent contractor who reports compensation via a Form 1099. The imprecise label “1099 employee” combines the two classifications, creating further confusion within the intricate issue.
Conclusion
Calling a worker a “1099 employee” can be an expensive mistake for a company. Independent Contractors are not covered by workers’ compensation insurance, are not subject to the company’s unemployment or payroll taxes, and do not receive overtime or minimum wage. However, employers must ensure that all of these protections are maintained for employees. Calling a worker a “1099 employee” could potentially cause employers to pay for pricey insurance, payroll systems, and wages that are not otherwise required if the worker is actually an independent contractor. On the other hand, if a worker is truly an employee, then the company is risking six-figure workers’ compensation claims, wage and hour claims seeking two years’ back pay and overtime wages, and audits by the Department of Employment Security, the IRS, and the DOL.
While removing the term “1099 employee” from our vocabulary will not solve the issues associated with the challenges of classifying workers, the use of this term further complicates the distinction between independent contractors and employees. It is important to understand the distinction between an employee and an Independent Contractor. Understanding the inaccuracy of this terminology can be the first step in avoiding a costly penalty associated with misclassifying workers. If employers have questions or need additional guidance, please evaluate worker’s positions and job duties with an attorney.
