More Penalties for Misclassifying Employees as Independent Contractors?

The U.S. Senate Small Business Committee recently held hearings on the question of small businesses that incorrectly classify employees as independent contractors.

When I heard about the hearings and how they were positioned, I became concerned. I am concerned because the hearings seemed to lump together two different sets of behavior, as follows:

Behavior #1 — Employers who hire employees but call them independent contractors (often illegal immigrants for jobs that involve physical risks such as construction), pay them in cash under the table, and don’t report the payments at all to state or local tax authorities. These employers are trying to hide their actions.

Behavior #2 — Employers who are trying to do the right thing, hire people as an independent contractors, do not try to hide what they are doing, make the appropriate tax filings with 1099 forms, and believe they have some credible basis for treating the person as an independent contractor.

Behavior #1 is clearly wrong.

Behavior #2 may be perfectly legitimate, or it may have various gray areas. And keep in mind, currently the IRS and state agencies already have authority to take action if someone is misclassified.

Hey, look, if someone is misclassified and should be reclassified, so be it.  I’m not here to argue with existing laws.

But I think it’s pretty scary for business owners if behavior #2 gets treated the same as behavior #1, particularly if our legislators start bandying around harsher penalties. (If they’re holding Senate hearings, who knows where it could go?)

Over at the OPEN Forum, I wrote an article expressing my concerns about lumping together the two behaviors.

Of course, I wrote from the perspective of the small business employer. One commenter over there expressed the other side of the coin, from the perspective of an employee/independent contractor.

So — there are two sides to every story.  Please read the article:

When Did Hiring Independent Contractors Become “Illegal”?

Then weigh in — what do YOU think?

  • Do we need more penalties or more enforcement for behavior #2 above? Or do the laws and regulations on the books already cover situations where the employer makes the wrong call?

Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.