Employee Classification

It has become a newly important issue—independent contractors or employees—as this article from Third Sector New England notes.

An excerpt.

“Classifying workers as employees or independent contractors may be the hottest and most contentious issue in human resources management. It is also one that creates confusion and potential problems for nonprofits.

“The issue is hot because the U.S. government and state officials are aggressively pursuing employers who misclassify employees. According to the New York Times, President Obama's 2010 budget assumes that the federal crackdown will yield at least $7 billion over 10 years.

“More than two dozen states, Massachusetts included, also have stepped up enforcement. The Obama administration plans to expand investigations by hiring 100 more enforcement personnel. The IRS has begun auditing 6,000 companies to see whether they are in compliance with the law.

“Focus on Protecting Workers

“Federal and state regulations related to properly classifying workers were put into place for two key reasons. First, the regulations were designed to generate tax revenue. Second, the regulations help protect workers by ensuring they receive minimum wage and basic benefits. Given that most nonprofits strive to stand in solidarity for the rights of the underrepresented, it follows that we would want to abide by and support these laws. And, in fact, many do.

“In April, the National Employment Law Project and two dozen worker and civil rights, faith-based and other interested groups sent a letter to Congress urging support for this heightened scrutiny.

“Christine Owens, executive director of the National Employment Law Project, explains, "Independent contractor misclassification robs federal and state treasuries of billions in needed revenues... and denies wages, benefits and workplace protections to huge numbers of workers. More workers are falling prey to this kind of exploitation, and it puts a drag on the whole economy."

“Dollars and Sense

“Yet we regularly hear from cash-strapped organizations that contracting with consultants or independent contractors, rather than hiring employees, often makes good financial sense. Employers are required to pay Social Security and Medicare taxes when workers are classified as "employees." They don't incur those expenses when workers are classified as "independent contractors."

“In difficult financial times, reducing payroll expenses may be a tempting way for organizations to maintain mission-critical programs and services. And in fact, some workers prefer to be paid as independent contractors because of both the real and perceived financial benefits to them.”