What rights do misclassified employees have?

In My Humble Opinion
1

So, one of my employees came to me today, and asked, “Do you know anything about taxes?”

“Sure, I do my taxes, I might be able to help, what’s your question?”

So, she pulls out her paperwork, and she’s got a 1099 from her previous employer for last year.

I say, “Um, were you actually a contractor?”

She says, “Huh? What’s that?”

I asked, “Did your previous job ever tell you what to do, or how to do it?”

She says, “Well of course.” She does the same thing for me that she did for them (although she’s much happier and more productive for me than for them), and she is most certainly an employee, not a contractor.

So I reply, telling her that she should have been an employee, by all rights and laws, and that making her a contractor was not just uncool, but most likely illegal. I explain that even though she gets taxes taken out of her paycheck, I also pay quite a bit of taxes on her behalf. As a 1099, she doesn’t get this, and is liable for all the payroll taxes herself.

I asked her if she minded if her previous employer was thrown under the bus about this, and she did not seem to mind if they got in trouble over it.

So, short of hiring a lawyer, does she actually have any way of fixing this situation, and forcing her previous employer to pay her fair share of payroll taxes? Is there anything I can do, as her current employer, to help?

2

She can report them to the IRS, but if they are misclassifying a number of employees, having to stump up for payroll taxes might put them out of business and her friends out of a job. This is a fairly common employment law dispute category, and she can hire an attorney on a contingency basis (i.e. they just get a chunk of what they recover for her).

It’s a bit simplistic to say that being told what to do or how to do it makes you an employee, though. I tell people working on my house what to do and how to do it, but that doesn’t make me their statutory employer.

3

She’s not misclassified, her ex-employer likely knows exactly what they were doing, and yes, it is sketchy but not uncommon. I doubt she can do anything about it now except pay her self-employment tax for that year by amending last year’s return. She might be able to blow a whistle, but I think that depends on which state she is in, IANAL.

4

She can file as an employee with a note to explain why she doesn’t have a W-2.

She can calculate what she (as an employee, not a contractor) should pay in taxes and FICA, and pay it.

I can’t help but wonder, were no deductions taken from her pay, and did she not notice that and/or not know that it wasn’t the norm? Or did they take deductions out, which makes their violation even worse? (If it’s the latter, she’ll have to add them up if she has records, or calculate them as best she can otherwise – and certainly tell the IRS about it.)

5

And with all due respect, how the hell would you know whether or not she’s misclassified? The OP said “She does the same thing for me that she did for them…and she is most certainly an employee, not a contractor.” Does the OP not know what she’s doing?

6

I think he’s saying that “misclassified” implies it was a mistake. Instead this is a deliberate policy of classifying employees as independent contractors to evade paying payroll taxes.

7

Okay. I took “misclassified” to mean wrongly classified, intentionally or not.

8

Here is the IRS’s definition of a contractor vs. a regular employee.

It’s important to note being an employee is not just a matter of being actively managed and having set hours. There are also exceptions for certain industries - computer programmers and IT people are often paid as contractors while being treated essentially no different from employees. (Unfair, IMHO, but it seems to be generally accepted practice.)

9

OP, have your friend look at forms 8919 and SS8.

There is such a thing as a household employee, with 1040 filers using Sch H for reporting and paying their taxes. What you describe could be an employee, but it does depend on a variety of facts and circumstances.

10

Yes, she’s classified in the wrong category, but it is likely intentional.

What business are you in, OP, by the way? This is more common in some industries.

11

She doesn’t seem to mind too much about her previous employer going out of business, she was not well treated there. I don’t mind them going out of business, as they are competition that is unfairly competing by not paying their employees correctly. And yeah, my description was slightly simplistic, but it is also the basic guideline that the IRS uses to determine classification.

I didn’t look at her paperwork very long before noticing the difference between it and a w-2, and going on a tirade about how that was not correct, (not at her, at her former employer, and she agreed.) but I am pretty sure that there were no deductions taken out of it. It was obviously not professionally prepared, it looked like it came off an excel spreadsheet. (I use an actual payroll company, so they get actual professionally documented w-2’s.)

To expand, I trained her, I tell her when to come in, when to leave. I tell her what job she will be doing at any given time. I tell her when to go on break. I provide all the tools and equipment she will need to perform her job. They did the same, expect without the training.

I am quite sure that the misclassification was not accidental. It’s not just sketchy, it’s straight up illegal. I used the term misclassified in the same way the IRS is using it to crack down on 1099 “employees”.

Contractors that come and work on your house is a different thing, they have their own training, own tools, and own timeline. You are just telling them the end result is expected to be. You are not telling them how to do it.

I am in dog grooming. If she were a groomer, I could see it. I disagree with the classification of groomers as 1099’s but it’s almost legal enough that I could see it. I don’t do that myself, not only is it not fair to the worker, but I like to be able to tell my employees what to do.

This person is a bather. There really is no reason why she should be classed as contractor.

12

Oh hey, nice. I am printing these out now. I assume that I can help her to fill them out. She’s not very keen on bureaucratic stuff.

If she files them, would that cover her more or less. She’s still liable for her part of payroll taxes, which I am pretty sure were not taken out, but at least if her previous employer has to cover their share, that should help her out.

And if her previous employer gets some extra scrutiny from relevant places, like IRS, labor department, etc., that’s fine too.

13

Have her contact the local labor board and put her case out in front of them. If they believe she has been inadvertently misclassified, they will help her do what she needs to do in order to comply with the law. If an investigation is warranted, the Labor Board will do it and they will not use her name unless and until they have to.

14

I STRONGLY, very, very STRONGLY recommend that she consult with a PROFESSIONAL tax person, someone who does it for a living. I went through a problem with a former employer who didn’t do payroll correctly, misclassified people, withheld taxes from checks and kept them instead of passing them along to the IRS… By consulting a professional tax preparer (not a chain store, but an actual accountant) I was certain that I had covered myself, paid all applicable taxes, filled out all applicable forms, and so forth. The IRS’s primary concern is that you pay your correct amount of taxes, but when you get a messy situation having the proper paperwork will pay off if there’s any question about your side of the equation.

By the way - my former employer wound up in court and deeply hot water with the IRS, both state and Federal. But I’m in the clear, because I paid the taxes I owed on what I earned, even if my employer screwed up.

15

If need be, I can hook her up with my cpa or tax attorney. I don’t know what he would charge, but he may give a discount as I bring them a decent amount of business.

I would love for her former employer to end up in hot water over this. It would even be pretty entertaining if there was a general crackdown and audit of the industry. I may be the last one standing. I know that many of my competitors break all kinds of labor laws. I hire their former employees.

I have one that says, “Oh no, that’s alright.” when he shows up early, and I have him clock in. “I’ll just clock in at my scheduled time, but I’ll start working now.” And I’m like, “No! If you’re working, I’m paying you, that’s how it works.” He’s like, “really, my last place would always have me work off the clock.”

And they would. They would actually tell him to show up half hour before his scheduled shift, and start working, and not clock in… I don’t have any documentation of that, so it would be hard to go after them, but seriously, is anyone following the law anymore?

16

I upped for a tax attorney to prepare my taxes that year, but that was very much my choice. A lower cost option might be just having someone explain what forms are needed, what documentation to keep, and what the person’s rights and responsibilities are. If there was just one source of income it might be pretty straightforward - in my case, I had other, outside work and a couple of 1099’s (legit ones) on top of the screwed up payroll so I had been considering professional tax prep anyway.

17

I’ve worked many “contract” jobs as a computer guy, but I always got a W2 from the contracting agency, not a 1099. I was an employee of the agency, who was the contractor to the client. And when you hear about big companies like Microsoft or Amazon hiring large numbers of contractors, that’s how they handle it.

18

That right there is what draws the IRS and or state tax boards in with a vengeance.

I had several 1099 subs at one point, some also did jobs for other shops and were not required to take any given job and got a percentage of billed hours (usually about $30-35/hr). Sometimes they only worked a couple hours a day, sometimes we had big installs that took 3-4 8 hour days. I was happily writing some of these guys checks for $600-800/week and they were regularly starting work around 9 and done for the day by 2-3pm

19

Indeed.

In my particular case, because my taxes had been withheld from my paycheck, I was not responsible for paying them again. The IRS went after the former employer for their money. I was able to document this via paystubs (despite many errors in said stubs, there was a difference between gross and net pay) and employer issued W2’s (which weren’t 100% accurate, either). Due to the sloppy paperwork, we had to recalculate my gross vs. net pay independently of what the ex-employer claimed, based on check stubs and bank records. We did that for my entire term of employment (over three tax years) and if there had been discrepancies I might have had to make up the difference between tax I should have paid and what I actually did. I emphasize my particular case because I’m not a tax authority (that’s why I hired one) and my exact circumstances may or may not resemble that of the person described in the OP.

I still have it all in a file and organized, just in case there’s a question in the next decade.

20

I’m all for reporting people who are breaking the law like this. I was interviewing people for a medical assistant job once and one of the interviewees said she left her last job because they insisted she be paid as an independent contractor even though she had set hours and used their equipment. I almost wanted to tell her to report them to the IRS.