This question was answered by Charla Stevens of the McLane Law Firm
Q: My company uses independent contractors to perform services for us on an ad hoc basis. I do not need their services as often now and call them less frequently. One has filed for unemployment, and the Department of Employment Security (“NHES”) has said he is our employee. Now I am being told that my records are going to be audited. Am I in trouble?
A: It depends. You may have some issues to address. Often companies designate individuals as independent contractors when the relationship is loose, temporary or when the “contractor” prefers to receive payments under a 1099 rather than as a W-2 employee. These, however, are not necessarily the relevant factors to determine whether individuals are employees or contractors. NHES as well as the Department of Labor (“NHDOL”) and the Internal Revenue Service (“IRS”) have jurisdiction over matters and are taking action which can result in significant legal liability for businesses that make the wrong determination. Each agency employs its own test to determine worker status, and each has the power to conduct an audit of your records.
All of the tests focus on such issues as whether the individual is in business for himself, the company exercises any control over the work performed, the company provides the equipment necessary to perform, the work is performed on the company’s premises and the individual is responsible for the expenses of the business.
You should cooperate with any investigation that NHES conducts including giving them access to your payroll and vendor payment records. NHES will determine whether you improperly characterized workers and decide if you owe back unemployment taxes along with interest and penalties.
In light of recent developments, there are some additional concerns for your business. On September 17, 2010 Governor Lynch issued Executive Order 2010-3 requiring the various state agencies which touch on the issue of employee classification to pool and focus their efforts on identifying, investigating and enforcing breaches of the law. The NHDOL has been identified as the lead agency for the enforcement efforts and is charged with coordinating the work and the sharing of information.
What this signals for an employer who hears from one agency is that there is a likelihood that it will hear from others who have an interest in how employees are classified. Your best bet is to contact employment counsel to obtain advice on how to classify workers properly and to try to address the issue before your problem extends beyond one individual seeking unemployment.
Charla Stevens can be reached at charla.stevens@mclane.com.
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