Proper worker classification is and has always been a critical issue for New York employers. The distinction between employees and independent contractors impacts a wide range of business obligations, from payroll taxes to worker benefits. Misclassifying workers can lead to serious legal and financial consequences, including fines, penalties, and potential lawsuits. Below, our employment attorneys discuss the differences between employees and independent contractors and provide some insight into how employers can make informed classification decisions.
Understanding the Difference: Employees vs. Independent Contractors
Employees and independent contractors are fundamentally different in how they work, their level of autonomy, and the obligations employers have for each of them. For instance, employees typically work under the direction and control of the employer and are entitled to various benefits and protections under state and federal labor laws. Independent contractors, on the other hand, are generally self-employed and have more control over their work methods, schedules, and overall business decisions.
In New York, these distinctions affect obligations such as:
- Payroll Taxes: Employers must withhold income taxes, Social Security, and Medicare taxes from employees’ wages. However, independent contractors handle their own tax payments.
- Benefits: Employers are generally required to provide benefits, such as workers’ compensation, unemployment insurance, and paid family leave, to employees. However, this is not the case for independent contractors.
- Legal Protections: Employees are entitled to protections under laws like the Fair Labor Standards Act (FLSA), New York State Human Rights Law, and the New York Paid Sick Leave Law. But, these protections do not apply to independent contractors.
Understanding these differences is essential for New York employers, as each category triggers different obligations and liabilities.
The Tests That Are Used to Make the Determination
New York uses a combination of tests depending on state law or industry. For instance, in most cases, a “right to control” test is used (unless a different test is required by law).
If you are in the construction field, New York State’s Construction Industry Fair Play Act presumes a worker who works in the construction industry to be an employee unless the potential employer passes a version of the A-B-C test. Additionally, the New York State Commercial Goods Transportation Industry Fair Play Act stipulates that there are several considerations involved in determining whether a sole proprietor, partnership, corporation, or person qualifies as a distinct business.
So, as you can see, it is imperative that employers understand which tests will apply to their specific situations, and we encourage all employers to contact our office to speak to an employment attorney for additional guidance.
Evaluating Additional New York Guidelines
New York has specific guidelines to help employers avoid misclassification in certain industries. For example, as noted above, the New York Construction Industry Fair Play Act outlines clear rules for determining independent contractor status in construction work. Similarly, New York has unique guidelines for app-based workers that affect how workers for rideshare or delivery services may be classified.
Employers in New York should also stay updated on industry-specific laws and classification criteria, as these regulations are often expanded to reflect changes in the labor market and gig economy.
Drafting Clear Contracts
Whether a worker is classified as an employee or contractor, a well-drafted contract is essential to formalize the relationship. For independent contractors, the contract should specify that they are self-employed and clarify aspects like:
- Project Scope and Timeline: Contractors often work on defined projects with specific deliverables and timelines. This helps reinforce their status as an independent party.
- Payment Terms: Instead of hourly wages, contractors are usually paid a flat rate for a project, per milestone, or on a retainer basis.
- Independent Status: The contract should state that the contractor is not entitled to employee benefits or protections, helping establish the nature of the relationship.
New York courts may still evaluate the actual work arrangement over the contract terms, but having clear documentation strengthens the case for independent classification.
Conduct Regular Classification Audits
To ensure ongoing compliance, New York employers should regularly review worker classifications, especially if the nature of the work changes over time. Classification audits should review current roles, contracts, work arrangements, and any adjustments that may affect status.
Audits are particularly important for companies that rely on a large number of contractors, as employee classification laws in New York frequently change, and violations can lead to audits by agencies like the New York Department of Labor.
Understanding the Risks of Misclassification
Misclassifying an employee as an independent contractor in New York can lead to legal and financial consequences, including:
- Back Pay and Penalties: If a misclassified worker is determined to be an employee, the company may be required to pay back wages, overtime, and benefits, along with additional fines.
- Tax Liabilities: Employers may be liable for unpaid employment taxes, including Social Security and Medicare contributions, as well as penalties for failing to withhold these taxes.
- Increased Scrutiny: Misclassification cases often draw the attention of regulatory agencies, leading to future audits and potentially higher compliance costs.
By understanding and proactively addressing these risks, New York employers can better protect their businesses.
Seek Professional Guidance When in Doubt
Worker classification can be complex, and there may be instances where a role doesn’t clearly fit either classification. In such cases, New York employers should consult with a knowledgeable employment attorney and/or human resource professionals who understand state labor laws and industry-specific guidelines.
Professional advice can help employers stay compliant, reduce misclassification risks, and implement best practices for workforce management.
Have Questions? Our Employment Lawyers Have Answers
Classifying workers correctly as employees or independent contractors is essential for New York employers to comply with labor laws, avoid fines, and build a fair workplace. By understanding the applicable tests and industry-specific guidelines, employers can make informed classification decisions. Contact our office today if you have any questions or concerns.
