Will Changes to the Tax Code Reduce Claims of Independent Contractor Misclassification?

Unicorn independent contractor misclassification

Ha ha. Wishful thinking.

By now, we’ve all heard that the new tax code provides a 20% tax deduction for many small businesses, including potentially independent contractors. (More info here.) As a result, some workers might prefer to be called contractors instead of employees to take advantage of the new deduction. Contractor status may be particularly appealing to workers who don’t need health insurance or other employee benefits. But, as we covered here, it doesn’t matter what a worker wants. The facts of the relationship determine a worker’s classification, no matter what the parties want it to be.

Don’t expect this change in the tax law to mean that independent contractor misclassification claims are going away. They’re not.

First, audits aren’t going anywhere. Federal and state governments continue to view independent contractor misclassification as a big problem, depriving them of hundreds of millions of dollars in tax revenues. Governments will continue to enforce the misclassification laws, and the tests for independent contractor misclassification are unchanged.

Second, private lawsuits aren’t going away. Class actions are a huge money maker for plaintiffs’ lawyers, and misclassification cases commonly settle for many millions of dollars. If a worker has been misclassified, that worker has not received employee benefits, which may include 401(k) match, employee stock ownership, insurance coverage, paid vacation, reimbursement of expenses, access to the ripe-smelling cafeteria microwave, and those free styrofoam coffee cups that are in every office kitchenette and that always pull out of the stack two at a time when you only want one.

For many individuals, the draw of being a contractor will outweigh the loss of these employee benefits, but for some, it wont.

It takes only one person to file a lawsuit – including a class action lawsuit. Plaintiffs’ lawyers will find that one person.

Or you may create the unhappy plaintiff. Remember, most contractors are happy with contractor status until they are not. Go ahead, terminate the relationship and see if the contractor rethinks whether he should have been getting the company’s 5% match on 401(k) contributions over the past ten years. Disgruntled former contractors make good plaintiffs, even if they were happy while the relationship was active.

The tax bill creates financial incentives for many individuals to want to be contractors instead of employees, but it doesn’t tilt the scales so much that everyone will want to be a contractor.

Employment ain’t dead yet. Not even close.

Businesses should remain vigilant when reclassifying workers. Independent contractor misclassification lawsuits and audits are here to stay.

There is too much money at stake for the new tax bill to change any of that.

For more information on independent contractor issues and other labor and employment developments to watch in 2018, join me in New York on Jan. 30, Los Angeles on Feb. 27, or Cincinnati on March 28 for the 2018 BakerHostetler Master Class on Labor Relations and Employment Law: A Time for Change. Attendance is complimentary, but advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com, and list my name in your RSVP so I can be sure to look for you.
© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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