COVID-19 and Contracts:
Unilateral Classification of Employees

Key Takeaways

  • Proper classification of workers as employees or independent contracts is fact-sensitive.
  • Misclassification of workers results in severe state and federal monetary penalties.
  • Businesses should seek help under the CARES Act and workers should pursue individual assistance.

Employee Classification

As the federal government has issued new guidelines extending social distancing through the end of April, many small businesses are struggling to keep their brick-and-mortar stores open and their online presence vibrant. Some industries are more malleable and employers have been able to pivot their products and their services. Most, however, are not, due to no fault of their own.

Businesses with less than 500 employees are the backbone of America, and the savvy business owner knows that his greatest resource is human capital. To that end, employers are attempting to find creative ways of how to keep their employees engaged while at the same time ensuring that there will still be a business to run when this pandemic ends.

ContractsCounsel knows that our clients mean well when they try to help, but even the best of intentions can be unlawful and open up a small business to even greater liability. One question we have received with greater frequency is whether it is possible to convert a full-time, salaried employee to an independent contractor, and if so, how can it be done? Below are some guidelines.

Employee v. Independent Contractor.

One of the biggest mistakes a small-business owner can make is misclassifying a worker as an employee or an independent contractor. It is a fact-sensitive inquiry. There is a rebuttable presumption that a worker is an employee unless he or she works free from the employer’s control and direction, the work is performed outside the “usual course” of business, and the type of work is customarily considered an independent trade or occupation. Typically an employer should seek the advice of a human-resources expert or a labor/employment attorney before making such a determination.

Misclassification is important because simply changing a W-2 worker to a 1099 worker subjects an employer to significant monetary penalties by state governments. The Internal Revenue Service can also levy penalties for taxes that were not withheld from the employee. Penalties are higher in cases where there is demonstrated intent to deceive the federal tax system. Changing the status of your employee to an independent contractor by written agreement also does not relieve an employer from their liability for workers’ compensation and unemployment compensation claims.

Recommendation for Small Businesses.

Our recommendation to preserve your business and best protect your workers is to seek assistance under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and to instruct both your employees and your independent contractors to seek unemployment benefits. Do not seek to change the status of your workers at the time, but rather evaluate the options available under CARES for a loan through the Small Business Administration and encourage your workers individually to pursue all available resources to them at the state and federal level.

Recommendation for True Independent Contractors/Gig Economy Workers.

Even if your small business employees just one person – you – you may actually be an employee and eligible for unemployment insurance, depending on the length of your business tenure and status of incorporation. And even if you’re not eligible for unemployment insurance, consider applying for assistance under the Pandemic Unemployment Assistance program which aids freelances and self-employed people ineligible for unemployment insurance.

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