If you think IRS reclassification is the only dimension of 1099 risk, then think again. Independent contractor risk is expenentially growing, and you need to become familiar with the new laws to avoid a potential class action suit.
According to Garry Mathiason of the noted employment law firm Littler Mendelson*, there were 5,786 class action lawsuits for wage and hour violations filed in 2009, a 40% increase over the prior year and representing over 80% of all class actions. The cases include overtime, meal breaks and rest breaks, and minimum wage requirements.
And while your organization's HR department might have good processes in place to ensure your W-2 employees are correctly classified for purposes of wage and hour, guess what: they aren't checking your independent contractors.
If your business has misclassified workers as independent contractors instead of employees, then you may be on the hook for wage and hour violations, too. Getting independent contractor classification wrong means you have 1099 risk exposure in a host of areas.
What's more, initiating a wage and hour claim against a current or former employer is getting easier all the time for disgruntled workers.
As Workforce.org** reported a few years ago in spotting the surge in wage and hour class action lawsuits:
“The ease with which plaintiffs’ attorneys can certify a class or collective action under the federal Fair Labor Standards Act, coupled with worker-friendly state statutes and a lack of accurate time recording and reporting by employers, has resulted in an explosion of class-action overtime lawsuits around the United States in the past several years, labor attorneys say. Allegations of misclassifying employees as exempt from overtime and not paying for off-the-clock work hours continues [sic] to result in multimillion-dollar settlements and verdicts agains employers.”
You can't rely on a piece of paper like a 1099 agreement to classify workers as independent contractors -- even if they supposedly *want* to be paid as sub-contractors.
The courts and labor departments in the states will apply economic realities to the independent contractor test. Are the workers really operating their own businesses? Are they subject to the control of the business they are performing services for? Do they have profit and loss potential? Who owns the equipment being used? Is the service being performed a core aspect of the business hiring the contractors? These questions and more -- exploring the three areas of control -- can help a court discover whether the facts of the case suggest an employment relationship or a vendor relationship.
So before you sign another 1099 contract, it is time for your organization to perform an independent contractor risk assessment, and find out how much exposure you have to potential wage and hour violations. If you aren't sure, consult with Independent Contractor Engagement Specialists to be sure you are properly managing your contract workforce.
* Mathiason, Garry. Littler Mendelson. “Legal Risks, Healthcare Reform, and Your Contingent Workforce.” Presented at SIA Risk Forum on May 11, 2010.
** Roberts, Sally. Workforce Magazine. “Time Is Big Bucks, Class-Action Wage Lawsuits Show.” http://www.workforce.com/section/00/article/25/28/07.html