Topic 1: Correct classification of workers as employees Personal care and home care services are seldom performed by individual independent businesses, yet home care agencies frequently mislabel their employees as “independent contractors” and deny them basic workplace protections and benefits they are due.
Home care workers perform work that is an integral part of a home care agency’s business, these workers do not invest capital in a business, and generally have little, if any, ability to set their duties, hours, and wages. Agencies and other entities maintain the ability to intervene if the level of services provided does not meet expectations, and they typically interact with the consumers to recover payments and set up the care or services needed. This is also called “payroll fraud.” Are you aware that “independent contractor misclassification” is more common in lower wage jobs (home care, construction and janitorial to name a few), where some employers require their workers to sign “independent contractor” agreements as a condition of getting a job. There have been a number of court findings, where home care companies’ have classified their workers as “independent contractors” to be improper, because few home care workers are really running their own business. Yet some consultants and law firms continue to advise home care employers on how to set up an independent contractor model for their workforce.
Be sure you know the rules stipulated by the IRS when identifying an independent contractor. Check with your accountant, or contact the National Employment Law Project at 212-285-3025 or visit www.nelp.org. Per the IRS, the rule of thumb is “an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
1. A 1099 form is the form that the IRS requires businesses to use to report payment for services of non-employees.
2. To all other workers who are regular employees, businesses must issue a W-2 form and make proper payroll withholdings for each tax year.
Consequences of 1099 status
The consequences of misclassification can be grave. Besides owing back taxes to the feds, the business will also owe state unemployment taxes and unpaid worker's compensation premiums, and may owe unpaid overtime or minimum wages, medical expenses and unpaid vacation and sick pay.
Criminal penalties of up to $1,000 per misclassified worker and one year in prison can be imposed as well.
Paying upfront the employer and employee side of Social Security and Unemployment (FICA and FUTA) taxes, currently 15.3% of pay, along with income taxes. W2 employees, in contrast, pay only half of that rate and the other half is paid by their employer. (The employer FICA rate is 7.65% in 2022. Employees pay an additional 7.65% FICA tax, and self-employed workers pay the full 15.3%).
Additional state and local tax and reporting burdens placed on any worker running his/her own business, including requirements to pay for workers’ compensation and other state licensing and insurance requirements for businesses.
Calculating and remitting quarterly estimated self-employment taxes in addition to filing an annual return, as well as any individualized business tax deductions and credits.
Most significantly, being an independent business means that a worker is not entitled to the protections of minimum wage or overtime pay, compensation for on-the-job illnesses or injuries, unemployment insurance if separated from work involuntarily, employment-based benefits like health insurance and retirement contributions, or protection against discrimination.
Examples of reported cases of home care and other business worker misclassification
Lady of Fatima Health Services, a home health care agency in Philadelphia, failed to pay proper overtime, misclassified some employees, and fined more than $430,000 in back wages, damages, and penalties.
Perdue Farms faces a class action complaint brought in a Georgia federal court by chicken farmers claiming wage and hour violations under the Fair Labor Standards Act due to the farmers’ alleged misclassification as independent contractors instead of employees.
Caring First, Inc, a home health care agency in Florida, is being sued by the Department of Labor for misclassifying certain employees as independent contractors and paying them a flat hourly rate, regardless of the number of hours worked.
Christian Home Healthcare Corp. a home health care agency in Pittsburgh, was fined $1.6 million for back wages and liquidated damages, to 546 home health aides of improperly classifying workers as independent contractors.
U.S. Department of Labor's Wage and Hour Division Administrator’s Interpretation, (USDOL, July 2015)