In this case, as a hotel owner, I faced with a set of legal problems brought by my independent IT worker which could not only interfere with hotels daily operation, but also cost me more than $50,000 fine and employee compensation. The only independent worker I hired three years ago for managing IT system is now disappeared with leaving her tax obligation to me. Due to not receiving any previous notice, I dont have any employee currently cable to manage IT system. In addition, the company is facing with a complaint about over time working without equal payment.
There are three most important facts in the case. Firstly, if the IT worker was hired as an independent contractor rather than employee is important because employer do not share any independent contractors tax responsibility, such as withholding taxes and paying for Medicare, except filling Form 1099-MISC (Steingold, 2017). However, if the IT worker is considered as an employee under government rule, I will receive the penalty for misclassifying the IT worker and be liable for taxation and $50,000 fine. Secondly, the IT worker worked for over 50 hours a week and threatened to complain about me failing to pay him over-time to IRS is an essential fact. This fact indicates whether I should be responsible for her over-time compensation or not, which could be a large amount to pay off. Also, it reminds me the importance of keeping updated with employees working hours. Thirdly, although Notice of Leave is not required by law, the IT worker left with a credit card which belongs to the hotels property and gave no time for the hotel to find a replacement which caused damage to hotels reputation and operation. Therefore, this fact is quite important to decide the whole case and it can support me in this case.
According to the facts in this case, whether the IT worker is an independent contractor or employee controls whether the case can be decided in my favor or not. Therefore, any fact that proves that I have a poor behavioral control, financial control and relationship over the IT worker can help enhance the likelihood that IRS consider the IT worker as an independent contractor (2017). For example, the fact that no detailed direction for the IT workers job performance; no on-the-job training provided to the IT worker; and no uniform requirement for the IT worker while other employees have certain requirement can demonstrate the poor behavioral control over the IT worker (2017). Whats more, these facts have a great chance to be true as the IT worker is the only worker in IT management so that no further instruction, requirement and training can be given to her department. In addition, during my employment relationship with the IT worker, if the facts that having a written contract confirms her independent contractor status and providing no Form W-2, employee-related benefits are true, the chance of the IT worker being considered as an employee can be reduced (2017).
However, there is nothing I can do with the financial control part. Although the IT worker was paid on a monthly salary which offers me a possibility to defend myself by claiming that he was exempt from overtime pay under FLSA (Fair Labor Standards Act), defending her exempt status will automatically confirm her employee identity (Murray, 2019). Also, the credit card I authorized to him for making purchase to support better IT management prevented him from making significant investment. Therefore, in order to avoid meeting difficulties in proving the independent contractor is a legal independent contractor under IRS, I should have had a clear employment contract signed by both me and the IT worker, which identifies him as a legal independent contractor and free me from her taxation. In addition, I should have defined the payment method in the contract as a flat fee and IT management as a project. Therefore, I will not be liable for her overtime pay and her independent contractor identity can be better supported. Whats more, in order to make him liable for the damage brought by her sudden leave, I should have established a company policy that requires a two-week Notice of Leave and whoever fail to give a notice to the HR department will be considered as a breach of contract and liable for all the loss brought by the leave.
On the other hand, there are some facts will disturb the decision to be made on my side. Firstly, any fact that supports the IT worker is an employee not only leads to the burden of taxation and insurance on me, but also brings me the penalties caused by misclassification of the IT worker.s Therefore, the facts that helps prove IT workers employee status, such as the written contract did not define her as an independent contractor; the credit card I gave her paid for all the purchase so that she did not make any investment by herself; she enjoyed employee benefits can be harmful to the case decision (2017). Whats more, if it is proven that the hotel has a certain policy or a written contract for overtime pay which I failed to follow will make me liable for her unequal overtime payment and require me to make a large amount of compensation for her loss, especially when I lose tracking of her exact working hours.
Having deficient contract is one of the common mistakes shared by employers when they are hiring independent contractors. As more and more employers realized that contract is a necessity for legal compliance, they added an independent contractor circumstance on the agreement; however, related factors may be deficient for employers to pass the independent contractor test under IRS rules (Avilez, 2013). In this situation, employee misclassification occurs and bring penalties and interest. For instance, in this case, I might suffer a duty of taxation brought by the IT worker as a result of employee misclassification caused by deficient contract. To avoid this situation, employers can consult lawyers or experts to create a complete contract to free them from legal issue.
Another mistake made by most employees is giving too much control over the independent contractor that automatically turns them into employees. A lot of companies have a policy that confine the training program, instruction for job performance, and payment method, which is also followed by independent contractors. In addition, as independent contractors are usually hired to perform specialized tasks, the possibility for them to influence a businesss profit and loss keeps increasing. For example, in my case, the IT worker took care of the whole IT department and received monthly payment; therefore, the chance for her being turned into an employee increased. To avoid this situation, independents contractors should be given enough freedom to perform their jobs and treated separately from employee policy.
Although I will try my best to defend myself from the IT workers complaint, I need to prepare with the worst consequence I might have in this case, which is the IRS decides that I misclassified the IT worker. According to IRSs rule, if the decision truly occurs, I will have to compensate the IT workers work-related tax and insurance for three years. The worst thing is that I might face with state governments audit, which can bring a bad effect on my hotels reputation, daily operation and employees faith toward the hotel (2017). Besides these losses, I can even face with a prison penalty, which I hope not. Because other than IRS, DOL (Department of Labor), state tax agencies and state labor departments will also be interested in my employee misclassification (2017). All of them devote in defending and correcting the employees lost in benefits and unequal treatment because of the misclassification.