Misclassifying Your Employees as Independent Contractors
May 18, 2013
Do you really have sub contractors or disguised employees? Are you sales help or service techs really independent contractors so that you don't withhold taxes, make employer contributions and other employee benefits? You know you risk heavy fines and penalties when you misclassify your employees as independent contractors. The following article by Judge Ruth Kraft should be of interest to you.
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THE TITILLATING COSTS OF INDEPENDENT CONTRACTOR MISCLASSIFICATION
One of my favorite cases, as a judge, involved the gentlemen’s club “Scores”. Believe me, the courtroom was packed with judges and court personnel, just to get a look at the statuesque witnesses (fully, although tantalizingly attired) at trial!
In October, 2010, a federal court decision certified a class action of adult dancers who performed services at a gentleman’s club in New York City. The dancers claimed that they were employees under federal and state laws and had been misclassified as independent contractors. Among other things, they alleged the failure of the putative employer to pay overtime for hours worked in excess of 40 per week, requiring them to pay “house fees” and deducting service charges for tips. In 2013, after extensive discovery and three court-initiated mediations, the case settled at a total cost to the club of $8,000,000! Attorneys fees constituted $2,175,000 of the total award.
How is this informative? First, it is clear that plaintiff’s counsel is the biggest winner. The minimum payout to members of the class was about $3,700. But, in addition, the Club faces additional costs. It is likely that its own legal defense fees would equal or exceed those payable to plaintiff’s lawyers, which would bring the total cost to well over $10,000,000.
All it takes to begin an audit of employment status is for one discharged worker to file for unemployment. This can trigger interdepartmental review of the business’s activities and referral to the IRS as well as notification to sister states, if related entities operate outside New York. When one potential plaintiff seeks counsel, the employer becomes an instant target for a class action suit as well as government-instituted litigation.
Enhancing compliance and minimizing exposure to future misclassification liability is imperative in this regulatory environment. Do you need a plan? Don’t make this decision on your own. Consult with our compliance experts: Jennifer Kirschenbaum, Esq or Judge Ruth Kraft. Jen can be reached at (516) 747-6700 ext. 302 or Jennifer@Kirschenbaumesq.com and Ruth at ext. 326 or RKraft@Kirschenbaumesq.com.