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.