Is It Worth It To Risk Using 1099 Workers To Avoid Employee Responsibilities?
Many contractors are using what are refer to as 1099 workers to avoid employee and payroll related administrative responsibilities and financial costs. Some use this tactic to reduce their costs to help win bids and or make more money. If you never get caught you may feel or believe it was worth it. On the other hand if you get caught, whether you knew what you were doing was illegal or you really believed what you were doing was OK, the financial and litigation related costs can kill your business. The chance of this happening has dramatically increased in certain areas of the country because Washington is offering money to states to help them do so. Read on to find out about what is already happening in Virginia.
In a well written article written by Courtney Malveaux of Thompson McMullan PC, Courtney shares a scary story where a GC jobsite is inspected by VA’s version of OSHA and makes and on-site determination that certain “Independent Contractors” were actually employees, triggering the automatic loss of any ability to negotiate violation penalty reductions. The story gets much scarier as you read on; I suggest you read the whole article.
“Under the new policy, if the inspector declares that your contractors should be considered employees, watch out. You’re paying full freight on each penalty, without exception. Your only recourse would be legal action.” Courtney Malveaux
Guilty until proven innocent
The part I found most scary in the story was that the contractors who take this risk, for whatever reason they justify doing so, are automatically assumed to be guilty by the inspectors. If that happens to you it means you are guilty until proven innocent, at your own expense to try to do so. And, even if you eventually win your legal battle, you are not entitled to receive any damages for your challenges. So your legal fees cannot be recouped.
That means you have to pay up on any fines, at their full rate (anywhere from $7K to 70K per violation) right away. Then you have to decide if you are willing to wait for your legal case to make it through a legal system sponsored by the same entity that is accusing your business.
Collateral damages may be unavoidable
From what I have witness I know the story can go even further than explained in the article. For example if the 1099’s are deemed to be employees you may also become responsible for all employment related taxes on all the money you have paid to them to date, plus fines of course. The same may happen with Workers Compensation and General Liability insurance coverage. Again the likelihood of these things happening has also become more likely. For example in Massachusetts several different state departments are participating in a memorandum of understanding, committing to refer observed violators discovered by each department to the other departments. In a 2012 article I reported on how OSHA and EPA have done the same regarding RRP Inspections.
The Bottom Line
As a business owner only you can decide the level of risk you are willing to take on by avoiding employment responsibilities. I recognize by doing so you may be saving your business and your customers money. At the same time by doing so perhaps both of you are preventing a worker, or many workers, from having the employment rights and benefits your customers expect and even demand at their jobs. Some know they are doing it. Some, I hope, just found out.
A Hearing on the Rate Filing will be held at 10:00AM on Thursday, January 30, 2014 at the Division of Insurance, 1000 Washington Street, Boston, MA. For more information you can refer to 
I want to thank fellow EMNARI Member 
“Schemes like this to avoid paying premium undermine the purpose of workers’ comp insurance – to protect workers who are injured on the job – and will result in unwanted attention from our investigators.”
How would you look at that? I know one contractor who had that happen to him. When I asked him about it he told me he was definitely scared about going to prison so he spent big money to hire a good lawyer to try to keep him out of prison. He said the lawyer was successful but he was definitely sweating it right up until the final verdict. He didn’t get any jail time but did have to pay a lot of money in fines. He also told me that when everything was said and done, and based on all the money he saved over the years by cheating, the fine and lawyer fees were far less than the money he saved. He told me he felt it was worth the risk.
