Taxes

Freelancers Are Getting Pulled Into Worker Misclassification Fights


Freelancers Are Getting Pulled Into Worker Misclassification Fights

Photograph by Curi Hyvrard/Corbis

America’s 17.7 million independent workers will earn about $1.2 trillion this year, according to a study published last month by MBO Partners. Employers will tell you the rising freelance economy is good for workers, who get to set their own hours and work in their pajamas. Regulators say misclassifying employees as contractors robs governments of crucial tax revenues and exploits workers, depriving them of health care and other benefits.

Both sides are right. There are plenty of workers who like being independent—and genuinely are as defined by state and federal law. Typically, that means they own their own businesses, work for different customers, and set their own hours, according a Bloomberg story last week by Jim Efstathiou Jr. on mislabeled contractors.

Then there are such examples as that of George Perry, a Dayton, Ohio, construction worker who agreed to file taxes as a contractor as a condition to being hired. Perry agreed to an hourly wage well below standard pay, Efstathiou writes, then was denied unemployment benefits when he was injured and lost his job.

Increasingly, the misclassification fights are making their way into state courts. Thirty states have worker misclassification laws on the books, up from 23 in 2010, and recent investigations in California, New York, and Massachusetts showed that misclassifying workers as contractors helped employers save millions.

A recent case in Oregon shows how independent workers of a different stripe can get pulled into the struggle. In 2009, the estate of a deceased Oregon resident named Alan James asked its part-time bookkeeper to sign an independent contractor agreement, according to Richard Meneghello, a Portland (Ore.)-based attorney at law firm Fisher & Phillips, in an article in the Daily Journal of Commerce last month.

The agreement stated that the estate didn’t “have the right to direct or control the means or manner in which [she] provided the bookkeeping services,” and that “she would be solely responsible for all taxes and fees associated with the performance of her work.” Oregon’s Employment Department argued that the bookkeeper was an employee, in spite of the agreement, and that the estate owed payroll taxes on her salary.

The amount owed was less than $400, says Meneghello. The state went “to the mat on what might have been an easy amount to forgo,” he says. Likewise for the James estate, which had “no economic reason to fight this.”

Clark is a reporter for Bloomberg Businessweek covering small business and entrepreneurship.

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