Worker Classification: It’s Everyone’s Business

By Michael Myszewski and Janell Knutson

Employers doing business in Wisconsin must correctly classify their workers as either employees or independent contractors. The Wisconsin Department of Workforce Development (DWD), through its Unemployment Insurance (UI) Division, works with employers to ensure that all workers are classified correctly.

There are significant differences between being classified as an employee or an independent contractor. For example, employees are eligible for unemployment insurance and workers’ compensation benefits.

The Fair Labor Standards Act also applies to employees. Federal and state taxes are withheld from employees’ paychecks, with employers paying half of the Social Security and Medicare taxes.

In addition, employees may be eligible for employerprovided benefits, such as vacation time, sick leave and retirement benefits. None of these protections and benefits are available to independent contractors.

In Wisconsin, workers are presumed by law to be employees. The employer has the burden to prove that a worker is an independent contractor. Worker misclassification occurs when an employer wrongfully identifies a worker as an independent contractor rather than an employee.

Worker misclassification has negative consequences for both workers and employers. Misclassified workers do not receive the legal protections to which they are entitled, such as unemployment and workers compensation benefits. Workers are also responsible for the entire Social Security tax and must manage their own federal and state tax payments.

Employers who misclassify their workers obtain an unfair competitive advantage by doing so. Employers who misclassify do not pay unemployment insurance taxes or workers’ compensation premiums, they do not pay the employers’ half of Social Security and Medicare taxes and they avoid the costs associated with employee tax withholding. This puts employers who correctly classify their workers as employees at a significant competitive disadvantage to those who engage in misclassification when bidding jobs or setting prices.

When an unemployment insurance audit finds that an employer has misclassified workers, there are significant negative consequences. The employer will owe UI back taxes and interest and may be assessed a penalty for failure to file tax reports.

Employers who are involved in construction-related industries and found to have intentionally misclassified employees can be assessed an administrative penalty of $500 per misclassified worker, up to $7,500, in addition to tax and interest. Further, if an employer continues to engage in misclassification, in addition to owing tax, interest and administrative penalties, a referral for criminal charges for intentional misclassification may be made by the Unemployment Insurance Division to the Wisconsin Department of Justice.

DWD’s Unemployment Insurance Division administers a robust program of employer audits and worker classification investigations to ensure proper worker classification. Unemployment Insurance Division auditors conduct nearly 3,000 field audits per year.

One of the main functions of the compliance audits is the detection and identification of misclassified workers. The Bureau of Legal Affairs Worker Classification Section has investigative staff members who conduct worker classification investigations at construction worksites and business locations throughout the state. The investigative team conducts criminal tax evasion, intentional misclassification and employer coercion investigations. The team also conducts claimant benefit fraud and employer aiding and abetting benefit fraud investigations.

DWD created a nationally recognized website to assist employers in correctly classifying workers. The website, Worker Classification (wisconsin.gov), provides information on how to correctly classify a worker as either an employee or independent contractor for purposes of unemployment insurance. The website walks an employer through the independent contractor tests in a step-by-step process for general private employers, nonprofit employers, state and local government employers, trucking employers, logging employers and Indian tribal government employers. The website also contains the independent contractor tests for workers’ compensation, labor standards and equal rights. For those seeking more detailed information, statutory citations, links and case study references are included on the website.

The worker classification website also contains several videos on worker misclassification as well as two that address unemployment insurance issues—how to properly classify workers and how to prepare for tax appeal hearings. The website also provides a Need Assistance? link to an email box that is monitored by Worker Classification Section staff. Questions on worker classification will be answered in a timely manner. The mailbox can also be used to submit complaints about businesses that misclassify.

Proper classification of workers benefits both employers and workers. Workers who are properly classified as employees receive the benefits to which they are entitled by law. Employers benefit because proper worker classification levels the playing field for all businesses and contributes to a more competitive environment. Additionally, the Unemployment Insurance Trust Fund is funded by employer taxes, and a stronger trust fund results in lower taxes for employers.

DWD makes every effort to work with businesses to help them properly classify workers. The department also will investigate and, if necessary, take enforcement action against businesses that do misclassify their workers.

Remember, workers are presumed to be employees unless the employer proves that workers meet the legal criteria to be independent contractors. For questions about worker classification, contact: workermisclass@dwd.wisconsin.gov.

Michael Myszewski serves as section chief of the Worker Classification Section at the Wisconsin Department of Workforce Development. Contact him at 608-261-5835 or Michael.Myszewski@dwd.wisconsin.gov.

Janell Knutson serves as director of legal affairs in DWD’s Unemployment Insurance Division. Contact her at 608-266-1639 or Janell.Knutson@dwd.wisconsin.gov.