There is some uproar in Tennessee centering around employers wrongly classifying independent contractors. Some are pushing for legislation that will penalize employers who classify workers as independent contractors instead of employees.
Employers are motivated to classify workers as independent contractors for numerous reasons. Independent contractors don't receive unemployment; employers don't have to pay employee taxes; they also don't receive health benefits; they can also be paid less than employees of the company who are doing the same work. In all fairness, many independent contractors are taken advantage of, but there are others who are not taken advantage of.
Michigan does not administer any punitive fines to employers who wrongly classify employees as independent contractors. However, with Tennessee pushing for new legislation, and the prospect that penalizing employers will generate millions in revenue, it is not unlikely that Michigan will follow suit.
There are current incentives to classify workers correctly. First, just because there is no administrative penalty in Michigan, that does not mean there won't be a tax penalty. If it turns out that an independent contractor should be an employee, then the employer will be charged back employment taxes and a late payment penalty. Second, worker's compensation is based upon employee payroll, not independent/sub-contractor payroll. Worker's compensation is audited each year and if the insurance company discovers an independent contractor should have been an employee, the employers work comp premium will sky rocket. Third, it is morally wrong because it deprives people of necessary work benefits: health care, social security deposits, unemployment deposits and higher wages.
The resounding question should be, how do employers correctly classify workers as independent contractors? The standard procedure is to run through the Economic Reality Test. This was a test developed in McKissic v Bodine, 42 MichApp 203 (1972) and is an eight part test. No single question of the test is controlling, but it must be taken as a whole and taken in context.
1) What liability, if any, does the employer incur in the event of the termination of the relationship at will?
2) Is the work being performed an integral part fo the employer's business which contributes to the accomplishment of a common objective?
3) Is the position or job of such a nature that the worker primarily depends upon the salary for payment of his/her living expenses?
4) Does the worker furnish his/her own equipment and materials?
5) Does the individual seeking employment hold him or herself out to the public as one ready and able to perform tasks of a given nature?
6) Is the work or the undertaking in question customarily performed by an individual as an independent contractor?
7) Control, although abandoned as an exclusive criterion upon which the relationship can be determined, is a factor to be considered along with payment of wages, maintenance of discipline and the right to engage or discharge employees.
8) Weight should be given to those factors that will most favorably effectuate the objective of this statute.
In summary, while it is more costly to pay a worker as an employee instead of an independent contractor, if the worker is actually an employee it is cheaper to pay him/her as such in the long run. If you have any questions contact the Michigan Depart of Energy, Labor & Economic Growth.
