Mark Pestronk
Q: As a cost-cutting measure, when I start bringing back my staff that I laid off because of the pandemic, I am going to try classifying them all as independent contractors (ICs) rather than employees. In that way, I could save the employer's social security and Medicare contributions, unemployment taxes and workers' compensation payments. Does that make sense? What if I paid them on commission rather than on salary or hourly wage? What if they are all home-based? If such a move would be risky, what are the chances of being caught and having to pay penalties for misclassification?
A: If your staff performs the same work that they did while they were employees and you exercise the same degree of supervision over them as you did before, your staff will probably not qualify as ICs. Calling them ICs and paying them without withholding could subject you to civil and criminal penalties as well as the taxes you should have withheld.
The law of independent contractors versus employees varies from state to state, as does the risk of misclassifying them under state law. If you are in one state and your IC is in another, you have to be mindful of the laws and enforcement policies of both states. To make it more complicated, some states have several standards -- one for taxation, another for labor law and another for unemployment, for example.
On top of the state variations, you have federal standards, and even those are different for different purposes. The IRS has one test and the Labor Department another, as do other federal agencies.
Enforcement varies from state to state. In general, the bluer states have stricter laws and policies against erroneous classification of workers as ICs. Some states even criminalize intentional misclassification, and I am afraid that your plan could fall into that category.
It makes no difference whether you pay them a fixed amount per hour or year, a fixed amount plus commissions or straight commissions. Nor does it make any difference whether they are home-based or work in your office. In all such cases, if they perform the same work that they did as employees and you control their work as you did before by, for example, setting mandatory work hours, then they will be deemed employees by any government agency that conducts an audit.
In most cases, audits are triggered by complaints from unhappy workers who would rather continue to be treated as employees. If everyone accepts the new plan, the chances of audit are smaller, but some state agencies do conduct random audits.
Notwithstanding all of the foregoing, you could conceivably structure your relationships to make them true ICs by allowing them to work when, where, how and how much they please under contracts that set their status as ICs, depending on what state you and the ICs are in. In some states, even this structure would not work, however.
If you want to explore the feasibility of your plan any further, you should consult a knowledgeable employment attorney.