It is essential for an employer to correctly classify workers as employees or independent contractors for it to comply with federal, state, and local laws. Misclassifying employees can have significant financial and legal consequences for employers, leaving them open to liability for unpaid overtime pay, payroll taxes, unpaid benefits, for example.
Employers may consider workers to be independent contractors rather than employees for numerous reasons, including in some cases the preference of the worker. Independent contractors typically do not receive the same benefits or protections as employees, and employers are not required to withhold or pay taxes on payments to independent contractors. However, an agreement between worker and employer does not control whether the worker is an employee or independent contractor in terms of employment law. In particular, the proper identification of employees is critical under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (IRC).
This guide provides a high-level overview of classification issues for plan sponsors.