Voluntary Classification Settlement Program Aims to Resolve Employee Misclassification as Independent Contractors

The IRS has recently implemented a program called the “Voluntary Classification Settlement Program” (“VCSP”).  The program allows eligible employers to pay a small sum in order to obtain partial relief from federal employment taxes for previous mis-characterizations of workers as “independent contractors” when such individuals should have received classification as “employees.”  The announcement of this program undoubtedly marks a positive development for employers who have engaged in this type of employee misclassification and who now wish to reduce their tax liability and avoid IRS audits.  However, from an employee perspective, the fact that this sort of misclassification remains so frequent and widespread that the IRS has found a need for such a program in the first place evokes a timeless question in employment law: why does the distinction between “independent contractor” versus “employee” even matter?

The implications of whether you constitute an “employee” versus an “independent contractor” are immense.  Namely, only qualified “employees” are entitled to statutory protections under certain legislation, including Title VII of the Civil Rights Act, the Americans with Disabilities Act (“ADA”), the Family and Medical Leave Act (“FMLA”), the Age Discrimination in Employment Act (“ADEA”), the Fair Labor Standards Act (“FLSA”), the Illinois Workers’ Compensation Act, the National Labor Relations Act (“NLRA”), and the Employee Retirement Income Security Act (“ERISA”).

Each statute has its own definition of a qualifying “employee.”  In general, the employer’s decision to simply label an individual as an “employee” or “independent contractor” will not serve as the dispositive factor for determining that individual’s employment status.  Instead, courts use a number of different tests depending on the particular statute at issue to determine whether someone meets the precise, legal definition of “employee.”  Each of these tests relies on a variety of factors.  However, an employer’s decision to label someone as an “independent contractor” can indeed impose practical and legal hurdles for an individual attempting to gain protection under an employment statute.  In short, the determination of whether someone constitutes an “employee” or an “independent contractor” can be a complex and nuanced exercise.  Nonetheless, qualifying as an “employee” under a particular statute can often mean the difference between having legal recourse against your employer and having none.  Hence, the distinction between “independent contractor” versus “employee” matters a great deal.  The emergence of the IRS’s VCSP program stands as yet another reminder of that fact.