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Early Stage, Step 8: Misclassifying workers brings risk

Editor's note: This is the eighth in a series of articles on developing start-up companies in the technology or biotechnology sectors. The most recent article focused on the tax law implications of employees and independent contractors. In this article, the authors address unemployment insurance.

Madison, Wis. - Wisconsin's unemployment insurance statute has its own test for determining independent contractor status. Although this test is similar in many respects to the common law “control” test (see Early Stage, Step 7), it is different in other respects and requires that certain factors be present in order to classify a worker as a contractor.

The worker must satisfy at least seven of the following 10 criteria:

• The worker must either have or have applied for a Federal Employee Identification Number (FEIN).

• The worker must have filed federal self-employment or business tax returns in the previous year based on the type of service he or she is providing to the employing unit, or in the case of a new business, in the year in which such services were first performed.
• The worker must maintain a separate business with his or her own office, equipment, materials and facilities.

• The individual must operate under contracts to perform specific services for specific amounts of money and under which the individual controls the means and methods of performing the services.

• The worker should incur the main expenses related to the services being performed.

• The worker is responsible for the satisfactory completion of the services and is liable for failure to satisfactorily complete the services.

• The worker receives compensation for services performed on a commission or per job or competitive-bid basis, and not on any other basis. (Individuals paid strictly by the hour do not satisfy these criteria unless the hourly rate is part of a bid or per-job agreement.)

• The worker must be able to realize a profit or loss under contracts to perform services.

• The worker has recurring business liabilities or obligations. (Some examples would be lease payments, insurance, advertising, professional fees, rent, and interest).

• The success or failure of the individual's business depends on the relationship of business receipts to expenditures.

If you misclassify employees as independent contractors for unemployment insurance tax purposes, this could be revealed if a worker files an unemployment insurance claim. In that case, you may be subjected to a general audit, during which you will have the burden of proving the contractor status of all similarly situated workers.

If the worker is determined to be an employee, you may be required to pay additional assessments. In recent years, the Unemployment Insurance Division of the Department of Workforce Development (DWD) has stepped up its enforcement efforts in this area.

Worker's compensation

Wisconsin also has its own rules for determining independent contractor status for worker's compensation purposes. The worker must meet all nine of the following conditions:

• The worker must maintain a separate business.

• The worker must obtain an FEIN or have filed business or self-employment tax returns with the IRS based on the work or service in the previous year.

• The worker must operate under specific contracts.

• The worker must be responsible for operating expenses under the contracts.

• The worker must be paid per contract, per job, by commission, or by competitive bid.

• The worker must be subject to profit or loss in performing the work under the contracts.

• The worker must have recurring business liabilities and obligations.

• The worker must be in a position to succeed or fail if business expense exceeds income.

If an employer misclassifies a worker for worker's compensation purposes, the employer may be subject to increased premiums, as well as substantial, uninsured costs for lost wages, medical expenses, and disability compensation for a worker who is injured while engaged in services for the employer. The employer may also face penalties.

More information is available from DWD's Worker's Compensation Division website.

Other laws

Other laws, such as the Fair Labor Standards Act and the anti-discrimination laws (Title VII or the Wisconsin Fair Employment Act) apply their own standards for determining whether a worker is an employee, thus subject to protection under these laws, or an independent contractor, thus not protected. These laws generally apply some variation on the common law “control” test described above, but each law will apply its own set of factors to determine whether the requisite level of control exists.

You can find more information about determining coverage under the FLSA at the Department of Labor's website. In particular, the Employment Standards Administration, Wage and Hour Division, publishes a useful fact sheet that describes the factors DOL will apply.

For more information about determining coverage under the Wisconsin Fair Employment Act (WFEA), you can review case law decisions by accessing DWD's on-line opinion digest of WFEA cases from DWD's Equal Rights Division homepage.

For information about determining coverage under Title VII, you can access the Equal Employment Opportunities Commission's website. In particular, Chapter 2 of the EEOC's Compliance Manual on “Threshold Issues” contains a detailed discussion of the factors the EEOC will apply during an investigation.

Going over it lightly is risky

As you see, the definition of independent contractor status creates a significant risk to an employer. Often, we find clients who treat this issue too lightly. Hopefully, you now know how to approach this issue more carefully and effectively.

Previous articles by Joe Boucher

Joe Boucher and Bonnie Wendorff: Early Stage 7, Part I: Just what is an employee?

Joe Boucher: Early Stage: Step 6 - Taxes, taxes, taxes!

Joe Boucher: Early Stage: Step 5 - Forming the entity

Joe Boucher: Early Stage, Step 4: Cautionary trademark tales

Joe Boucher: Early Stage, Step 3: Naming the entity

Joe Boucher: Early Stage Step 2: Choosing a domain name

Joe Boucher: Starting a tech business? Step 1 is minding the intellectual property

Joe Boucher: Madison is flourishing while Marinette is dying

Joseph Boucher is a CPA and an attorney with the Madison law firm Neider & Boucher, with expertise in estate planning and business law, including early-stage business formation. He has a law degree and an MBA from University of Wisconsin-Madison and a bachelor's degree from St. Norbert College.

Bonnie Wendorff also is an attorney with Neider & Boucher, and her areas of expertise include employment law and litigation. She has a law degree from the University of Wisconsin-Madison and a bachelor's degree in education from the University of Wisconsin-Eau Claire.

The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC.

WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.

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