Posted: 08.12.2008
Employee vs. Independent Contractor - By Leanne Moir

Penalties for misclassification can include fines, being held liable in civil court, the business forced to shut down, and the officers or directors subject to individual liability for sanctions notwithstanding the corporate veil.

Michigan businesses have recently seen a large increase in the use of independent contractors, largely because of the down economy.  Instead of hiring more people, many businesses opt to outsource certain work to contractors.  There is no shortage of skilled laborers to fill those ranks as many laid-off workers in the state need income. 

This increase prompted Governor Jennifer Granholm to create the Interagency Task Force on Worker Misclassification earlier this year.  The problem is that many employers misclassify a worker as an independent contractor when they are technically an employee.  If a worker is classified as an independent contractor, then the employer does not pay state payroll taxes, unemployment taxes, and often worker’s compensation benefits.  This reduces the cost of the labor, and therefore can be enticing for businesses to misclassify their workers.

After the task force report to the Governor on July 1, 2008, companies that use independent contractors may face increased scrutiny from state agencies.  Penalties for misclassification can include fines, being held liable in civil court, the business forced to shut down, and the officers or directors subject to individual liability for sanctions notwithstanding the corporate veil.  Therefore, it is important for employers to take a look at their work force to make sure that they are properly classified as employees vs. independent contractors. 

What classifies a worker as an independent contractor?  According to the Workers’ Disability Compensation Act, an independent contractor must maintain a separate business, render their service to the public (i.e. work for other businesses also), and can employ others.  Independent contractors also set their own hours and use their own tools or equipment. 

This information is important in determining the effect on a company’s worker’s compensation premium.  Michigan is a mandatory coverage state for all employers that have more than one full time or three part time employees at any given time.  If a worker is deemed an employee at the time of injury, they are able to collect worker’s compensation benefits, regardless of whether the employer originally had them classified as an independent contractor.  Because of this, independent contractors must carry their own worker’s compensation policy or be included in the payroll of the employer. 

It is always recommended that a business require independent contractors to carry their own worker’s compensation policy.  This reduces the exposure of risk to the company, as well as reducing the payroll and premium on their policy.  Employers must provide a certificate of insurance for all of their independent contractors at the time of their audit, otherwise any payment to the independent contractor will be treated like payroll to an employee.  In some instances, a waiver or exclusion can be obtained for independent contractors so that their payroll is not included on the policy.  To find out more about this, contact Leanne Moir at 586-977-6300 or lmoir@alcos.com

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