MikeB35

Employee or Private Contractor

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Before I get to in depth with this thread I would like to first and foremost make sure this is the correct venue/board. I will briefly describe the situation and if its ok then I will keep it here. Please let me know.

This is taking place in Michigan so right off the bat I will ask for any insight from @Brotherskeeper

Very short version is my wife worked for a woman performing various tasks, traveling 1 1/2 hrs to her house. She worked for her for over a year, from the beginning this woman told my wife she will be a (private contractor) not an employee. From the very little research I did quickly the tasks my wife did and from her contacting the department of labor she in fact was an "employee".

Now armed with this knowledge and with my wife working 50+ hrs a week without getting paid overtime a lawyer suggested we get her lost wages back, and at tax time the IRS will have to get involved. Its just a mess....

Any suggestions/information/insight?

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As Willing said, this is often a 'gray' area of labor law.  Keep in mind that the IRS wants you to report whichever way gives them the most money, and a labor attorney wants you to report whichever way gets him the most money.  Neither are particularly interested in what gets you the most money.  This is probably not the most ethical advice but I would find out what your income and tax liability would be as an employee with the additional overtime vs. just reporting the income as an independent contractor with any available self-employment tax deductions, and then use whichever method is most advantageous to you.  The caveat with this approach is that the IRS can go back 3 years in an audit, so you might want to set up a savings account to have the 'tax difference' money available if they ever do come calling in the next 3 years.

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I read the original question as being more about getting money now, and worrying about IRS later. How much money are we talking about, and is it worth it, considering that the employer will probably contest it until just dissolving the entity in question.

 

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11 minutes ago, Goody_Ouchless said:

I read the original question as being more about getting money now, and worrying about IRS later. How much money are we talking about, and is it worth it, considering that the employer will probably contest it until just dissolving the entity in question.

That's how I read it also, but I was answering looking down the road at tax time, which few people do when they ask the questions.

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The question of whether someone is an employee or an independent contractor is usually dealt with through the employer because that is who is getting the most benefit from the designation. The IRS and most State Revenue Departments have specific rules regarding who is a contractor and who is an employee for tax purposes (and the rules are skewed to being an employee because then the employer has to do witholding and other fees associated with employees that are not required with independent contractors). The rules center usually around control of the persona and the work they are doing (for example, can the person perform the work on the persons schedule or the employers schedule, does the person supply their own supplies, can the person look for work elsewhere without limits, etc.)

States also have specific rules for labor laws. Those usually coincide with the IRS rules.

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My apologies, I wanted to keep it very brief so that in any case this was in the wrong forum It would be directed and I could explain things a little better. So I will do the best I can as the middle man to paint the picture of the situation as then go from there.

My wife began working for a woman as her personal assistant, this woman sold cloths online like Facebook etc etc. Lu laroe or whatever those stretch legging are..lol. This job enabled my wife to have a flexible schedule like working from home, and when needed to drive up and stay at this woman house to work. Shortly after working for her the "mother company" if you will sent out a nation wide non compete contract. Sparing all the details of that contract it essentially stated that as of March 2019 either you sign this contract and lock yourself into the company keeping you from starting your own business up to one year after your termination with the "mother company". I would imagine most all of you are familiar with this type of contract or something similar. If not I can explain it a little more later.

Anyway, this woman my wife was working for was talking about starting up her own shop. So she refused to sign the contract and dropped out to start her own business. At this point my wife went with this woman to her new company and told my wife that she was going to be a private contractor giving her a 1099. My wife went with the flow because she needed the job, and I also went along with it because I am not versed in this subject just as Brotherkeeper stated. My wife was given daily tasks at the drop of a dime, any time of day that had to be accomplished. 50-60 hrs a week she essentially waited on this woman hand and foot (I say hand and foot sarcastically, but you get what I mean).

Fast forward to mid August of this year my wife suggested to me she thought about doing graffic t-shirts, her target was to make shirts for our brewery, or even shirts to sell for this woman. Just the mention of that to this woman she took it all the wrong way and assumed my wife was going to steal all of her customers. So labor day was a Monday, my wife had the day off, at 10 am she received a non compete agreement the same as what this woman got from the "mother company" in an e-mail. She was given 24hrs to sign the contract, in not signing the contract she could not work for this woman. So it forced my wife into a panic struck meltdown, no attorneys, banks, gov buildings are open on this day. To me it seemed like a strategic coup to scare my wife into signing the agreement.

Here is the part that makes this all weird and suspicious. This contract referred to my wife as an "employee" all through the agreement. It said nothing of a private contractor. My wife and I began to talk about the situation and I started researching because I was curious. What is considered and employee, and what is considered a Private contractor. Well all of the checklists provided at a state and Federal level pointed to my wife as being an employee not a Private contractor. So I suggested my wife call the department of labor, and she did. My wife didnt even finish this answering this persons questions before they stopped my wife mid sentence and told her, "yea, you're an employee"

If she is an employee then she is entitled to her wages not received in overtime. All the other mumbo jumbo involved with an employer falsely classifying and employee like fees and all that we dont want any part of. However once the can is opened it starts a whirlwind of all sorts of legality's.

I hope I better communicated the situation to shed some light better. Again I was just looking for either some insight on if its worth perusing of not. The amount owed if she is officially deemed an employee is around 2k in overtime pay. She has every single time card and stamp to show this is true and correct.

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35 minutes ago, MikeB35 said:

If she is an employee then she is entitled to her wages not received in overtime.

Not quite.  Once classified as an employee there are two pay categories.  Exempt and non-exempt.  Non-exempt employees are paid by the hour and legally entitled to over time for all hours over 40 in each 7 day work week.  Exempt employees also known as salaried are paid an annual rate regardless of the total hours worked in a week.  If your wife can legally be classified as an exempt employee then she would not be entitled to back wages or over time even if she is an employee not a contractor.

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1 hour ago, Clydesmom said:

If your wife can legally be classified as an exempt employee

Based on his description of the tasks his wife performed, she's not exempt. Also based on the tasks he described and conversations he described with the labor department, I'm pretty sure his wife will be considered an employee. 

Having said that, there will undoubtedly be interpersonal fallout that will result from flipping on the 'employer'. The taxes and penalties will probably put the 'employer' out of business and result in a substantial tax debt.  Only you and you wife can put a price on that. 

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39 minutes ago, Harry Seaward said:

Based on his description of the tasks his wife performed, she's not exempt.

There is a lot more to it than just what tasks are performed. I am in direct patient care and most people in those types of jobs are hourly non-exempt.  However, due to what we do and the demands it is more advantageous for both sides to be classified exempt. 

More often than not employers get it wrong and classify someone as exempt when they are actually an hourly employee.  Not the other way around.  Typically the employer gets caught when trying to deduct for time off like a doctors appointment while paying exempt salary but not paying over time when going over 40 in a week.  They can't have it both ways.

42 minutes ago, Harry Seaward said:

Also based on the tasks he described and conversations he described with the labor department, I'm pretty sure his wife will be considered an employee. 

I am sure she is an employee as well.  However, the cursory conversation on the phone with the DOL is meaningless at this point.  Until she actually files a complaint with the DOL and they do an investigation and rule she is an employee and classify her exempt or non-exempt the discussion is pointless.  No attorney will pursue a civil case against the employer without a ruling from the DOL and the phone conversation is not proof.

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1 hour ago, Clydesmom said:

There is a lot more to it than just what tasks are performed.

Not true. Job tasks are the only thing the DoL cares about when determining if an employee is exempt or not.  Well, ok.  An employee first has to make over a certain amount per week before the job duties come into play, but from there, it's all about job duties.

 

1 hour ago, Clydesmom said:

However, due to what we do and the demands it is more advantageous for both sides to be classified exempt. 

There is some grey area about what could be considered "administrative tasks", and possibly "professional", but the DoL will determine an employee to be either exempt or not based on the job duties.  I mean, the employer and employee can decide amongst themselves if an employee is exempt because it's mutually beneficial, and things may work out just fine for both sides forever, but all it takes is one disgruntled employee to blow the lid off.  My wife's employer was paying their laborers' over time as cash.  Everyone's a winner, except the IRS.  Guess who got slapped with a $140,000 DoL penalty when someone got pissed for getting fired because they were drunk on the job?  The penalty was not for gypping anyone out of pay - just because the gov't didn't get their cut.

 

1 hour ago, Clydesmom said:

However, the cursory conversation on the phone with the DOL is meaningless at this point.

It's more meaningful than OP otherwise trying to explain his wife's job duties to a bunch of know-it-all wannabe lawyers (myself included) on an internet message board.

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I thank you all for weighing in on this. I completely understand that there is a lot of grey area in this situation. I want to be very clear this is not about being vindictive and there is no malice behind this. It comes down to if the state or whoever decides she is an employee or not. My wife did speak to a lawyer, this lawyer said she has a VERY strong case, and said he would represent her at the employers expense. I know a lawyer will say anything for the business/money, anything to line his pockets. He did send a letter to my wife's employer, she had her lawyer respond with a very nasty, letter attacking my wife's character, threats, etc. Seemed like another scare tactic to make it all go away. I don't know.. In this down period I wanted to touch base with a collective group of intelligent people who can logically look at the situation and point out anything I may have missed. I like hearing from both sides of the coin because its just more information to retain. As always I respect each and everyone's opinions very much!

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Let's put the overtime discussion to the side for now because the real question is whether your wife was an employee or a contractor.

This determination can be made by the DOL but can also me made by the IRS or the Michigan Department of Revenue. In all 3 cases, the regulations are tilting toward making workers employees rather than contractors because of the benefits and the government gets their cut from employees through withholding as an employee (as well as unemployment and workers comp insurance payments) rather than having to chase the independent contractor for the taxes.

The non-compete clause would have definitely changed you wife to being an employee for the future because one of the main clauses of being an independent contractor is that you are allowed to look for business from multiple clients. Prior to the non-compete clause. the question centers who had control of your wife's hours, conditions, and equipment. If your wife had that control, she was a contractor. If you wife's boss had control of those things, your wife was an employee. Now that does not mean control of how much work your wife gets but whether she can do that work at her own schedule (as long as she finished the work within the deadline set by the person sending her the work). The question for that is, did your wife has set work hours or could she work whenever she liked (say midnight - 4am). Did your wife use her own equipment or did she use her boss's equipment. You can set the questions for these tests from the IRS website (or Michigan Department of Revenue) and make that determination yourself.

The problem your wife's boss has is, if you decide to go down the path of bringing in the government, the IRS and State Department of Revenue will get involved and things will get nasty real quick. The IRS considers the misclassification of employees to be a trust fund issue and even if your wife paid the proper taxes on her earnings, they will consider them not paid by the employer. This will result not only in taxes due but also a 100% penalty on the trust fund taxes not paid. The Michigan Department of Revenue will do the same thing. This is a serious issue and the thing IRS horror stories are made of because even if the company goes out of business, they IRS will go after the boss personally for the taxes. The boss might be able to argue that since your wife paid taxes, she should not have to (double dipping) that that will be just as expensive and she will need to get your wife's cooperation after she insulted her. Then there are the issues of unemployment tax payments and workers comp insurance payments. This is a bigger issue than overtime pay for your wife.

As for your wife's former boss's attorney (I assume that at this point your wife is not working for her anymore), I would (or I would direct my attorney) to send a sharply worded letter stating that she does not want to really go down this path because this can be a horror experience for the boss and it might be better if everyone came to the table to discuss the issue rather than getting the government involved.

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47 minutes ago, WhoCares1000 said:

The question for that is, did your wife has set work hours or could she work whenever she liked (say midnight - 4am). Did your wife use her own equipment or did she use her boss's equipment. You can set the questions for these tests from the IRS website (or Michigan Department of Revenue) and make that determination yourself.

This is a great question, thank you for that. She did use all of her bosses equipment, credit cards, systems, pencils, post-its the whole nine. When it came to hours I cannot answer on her behalf, from my observation, say my wife would start work at 9 am. If it was 7:30 and her boss needed something done, i.e. entering information into the system ordering or whatever, she expected my wife to do it RIGHT NOW.  I honestly should just have her take over the thread to better explain it then me.

55 minutes ago, WhoCares1000 said:

The problem your wife's boss has is, if you decide to go down the path of bringing in the government, the IRS and State Department of Revenue will get involved and things will get nasty real quick.

Yes, I totally understand this. We are not trying to "take down the man" if you will. At the end of the day as stated above, if she was unfairly taken advantage of we just want what is owed, nothing more.

 

57 minutes ago, WhoCares1000 said:

As for your wife's former boss's attorney (I assume that at this point your wife is not working for her anymore), I would (or I would direct my attorney) to send a sharply worded letter stating that she does not want to really go down this path because this can be a horror experience for the boss and it might be better if everyone came to the table to discuss the issue rather than getting the government involved.

I agree whole with this statement 100% I've read the horror stories online, read the fines and penalty's... it gets very very nasty...

I really appreciate the input from everyone, sometimes its easy to get jaded to one side of the story. Having a community that will bring in both sides unbiased really means a lot. It opens your eyes if you will lol.

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If you really want to know the answer yourself, fill out the form below and that can probably tell you, on the basis of how the form is filled out, whether your wife was an employee or a contractor.
https://www.irs.gov/pub/irs-pdf/fss8.pdf

It is sounding like your wife as an employee however based on the factors.

That said, the next question is how far in the process are you now? If I was handed the non-compete contract, I would have turned to my boss and said that if I sign this, I become an employee and seen what would happen. I think the boss acted to hastily and without attorney discussion herself (or did not tell her attorney the full story) because an knowledgeable attorney would have told her to not do that in this scenario. However, your wife has already contacted an attorney and the state so at this point, you are already well down the road to be able to turn back. It might be possible that the DOL employee already talked to his counterpart at the Department of Revenue and the ball is already rolling on their end. Your attorney also has already sent a letter and they have responded. I know you wanted your wife to be reimbursed for her labor but sometimes, it is better to walk away early rather than start a fight then try to walk away. Not as easy to change directions once a path is chosen.

Finally, this is a huge issue in employer/employee relations these days. Businesses seem to want their cake and eat it too. They want to control the person as an employee BUT they want to reimburse the person as an independent contractor because that is cheaper in monetary and time. The law says that they cannot have it both ways. Some states, such as California are cracking down on this big time and have even codified a court ruling with a specific test to determine who is an employee and who is independent. An employer cannot simply says that some is an independent contractor without giving up the control too.

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Since others are, admirably and thoroughly, covering this from a legal perspective, I'll comment from street level. 

It seems pretty obvious, from what has been posted, that the "employer" is what I would call "sketchy." When Parent Company sent a non-compete to protect their investment, "employer" did exactly what Parent Company feared and became a poacher. Having seen the effect of poaching, she sought to wield the same sword (going so far as to just copy what Parent Company sent.)

When people here get called by debt collection scammers they sometimes want to seek justice. They are all told not to bother because these "companies" will just fold up their tents and set up shop across town. Seems like the same situation here. "Employer" has a "nasty" lawyer on retainer and will use him to cost OP's wife more than 2K in expenses and aggravation to pursue this. In the end, "employer" will just fold up her Spanx resale "business" and start up again in her boyfriend's garage. 

If you have the time and energy to joust at windmills then, by all means, proceed. Frankly, I''d advise letting it go and chalking it up as a "teachable moment" in not making the same mistake in the future.

 

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19 minutes ago, Goody_Ouchless said:

Since others are, admirably and thoroughly, covering this from a legal perspective, I'll comment from street level. 

It seems pretty obvious, from what has been posted, that the "employer" is what I would call "sketchy." When Parent Company sent a non-compete to protect their investment, "employer" did exactly what Parent Company feared and became a poacher. Having seen the effect of poaching, she sought to wield the same sword (going so far as to just copy what Parent Company sent.)

When people here get called by debt collection scammers they sometimes want to seek justice. They are all told not to bother because these "companies" will just fold up their tents and set up shop across town. Seems like the same situation here. "Employer" has a "nasty" lawyer on retainer and will use him to cost OP's wife more than 2K in expenses and aggravation to pursue this. In the end, "employer" will just fold up her Spanx resale "business" and start up again in her boyfriend's garage. 

If you have the time and energy to joust at windmills then, by all means, proceed. Frankly, I''d advise letting it go and chalking it up as a "teachable moment" in not making the same mistake in the future.

 

Normally I would agree except that in this case, the employer has a bigger issue. The penalties for employment misclassification usually pierce the corporate veil and they go after the individual and you cannot bankrupt those costs. The employer is looking at easily $50,000 to clear this up if the government gets involved between the Michigan Department of Labor, Michigan Department of Revenue, and IRS. Also, the OP lawyer is so convinced that they have a case that they are willing to add their lawyer fees to the employer should the get a reward. This employer is in too much trouble for her attorney to be acting like a pit bull.

Again, I would send the employer's attorney a equally nasty letter explaining that their client is in a precarious position right now and that they need to change their tone.

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16 minutes ago, WhoCares1000 said:

Again, I would send the employer's attorney a equally nasty letter explaining that their client is in a precarious position right now and that they need to change their tone.

Absolutely, if this can be handled with a letter. Unfortunately it's probably safe to assume that "employer" is well versed in gaming the system and will probably calculate that this won't be a priority for a government agency decimated by budget cuts.

 

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31 minutes ago, Goody_Ouchless said:

Absolutely, if this can be handled with a letter. Unfortunately it's probably safe to assume that "employer" is well versed in gaming the system and will probably calculate that this won't be a priority for a government agency decimated by budget cuts.

 

If the below article is any indication, misclassification of employees is high on the Michigan Government's agenda and it looks like they will be willing to spend the money to investigate it.

https://www.apnews.com/f932e05470a34581a84ce73cee0b0481

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@Goody_Ouchless

Those bills relate to the increasing of the civil and criminal penalties related to misclassifying employees, not that those laws do not exist (and in fact, confirm that there are already laws on the books in Michigan regarding the issue).

In reviewing the issue, there is something for the OPs wife to consider. If the wife/couple took any business deductions on their tax returns for 2018, they will be required to pay the taxes on those as well as any fines and penalties and should not take any deductions in 2019 now that they know that she was misclassified, especially if they plan to go the government. Still will be quite a bit less than what the employer is facing should the government get involved.

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@WhoCares1000 I will confirm this tonight with my wife. I may just ask her to keep up on this post. Thank you for offering another take, as well as great information!

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38 minutes ago, WhoCares1000 said:

Those bills relate to the increasing of the civil and criminal penalties related to misclassifying employees, not that those laws do not exist (and in fact, confirm that there are already laws on the books in Michigan regarding the issue).

Yes - I'm just saying that many things sound good on paper, but if the enforcing authority is woefully understaffed it may take a while, especially considering the reported extent of the problem, for anyone to get around to investigating "employer." I just don't know how much attention this will get, especially if she makes herself scarce.

 

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