2009 Fall, Pg. 60. Traps to Avoid in Cutting Payroll Costs.

AuthorBy Attorneys Charla Bizios Stevens and Colleen Karpinsky

New Hampshire Bar Journal

2009.

2009 Fall, Pg. 60.

Traps to Avoid in Cutting Payroll Costs

New Hampshire Bar JournalVolume 50, No. 2Fall 2009TRAPS TO AVOID IN CUTTING PAYROLL COSTS No Such Thing as a Free Ride: How Employers Get Into Trouble Trying to Cut Payroll Costs(fn 1 )By Attorneys Charla Bizios Stevens and Colleen KarpinskyINTRODUCTION

In a soft economy, employers look for ways to reduce overhead and payroll costs. The typical payroll costs include not only an employee's salary or hourly wage, but also federal income tax and Medicare, unemployment tax and the cost of fringe benefits. When companies reduce their workforces to trim the bottom line, they sometimes look to alternative, less expensive forms of labor to fill the gap in the workforce. Examples include independent contractors, unpaid interns and volunteers. Each of these poses its own special set of considerations with which an employer should be thoroughly familiar before entering into relationships with such individuals.

I. INDEPENDENT CONTRACTORS

Independent contractors, sometimes known by the relatively benign term "consultants," are a seemingly attractive option for employers seeking to fill short-term requirements or cut costs. After all, an independent contractor gets paid a fixed amount documented by a 1099 with no taxes withheld or matched and receives no fringe benefits. What better way to cut costs and still get the work done? Unfortunately, many companies find themselves in deep trouble with the New Hampshire Department of Employment Security (DES), the New Hampshire Department of Labor (NHDOL) or the Internal Revenue Service (IRS) after engaging individuals to perform services as independent contractors. Each of these entities has a reason to make a determination of whether or not someone has properly been identified as an independent contractor; and each employs a very different test to do so.

Under state law, the distinction between an employee and independent contractor is of great importance. Employees are entitled to many rights and protections not available to independent contractors, such as workers' compensation benefits,and coverage under state wage and hour and discrimination laws, including whistleblower protections. Misclassification under state law can result in significant liability for employers including penalties, employment taxes, workers' compensation and unemployment compensation liability, claims for unpaid overtime, minimum wage claims, and employee benefit claims.(fn 2 )

For many years New Hampshire employers have both battled with and taken advantage of gray areas of the law relating to proper classification of workers. Effective January 1, 2008, however, the definition of "employee" was amended for purposes of state wage and hour, worker's compensation and whistleblower laws in the legislature's attempt to clarify the criteria for exempting workers from employment status under state workers' compensation as well as wage and discrimination laws.(fn 3 ) While the amended law provides employers a higher degree of certainty, there are still areas fraught with ambiguity, making it somewhat challenging to make correct classification decisions.

II. NEW HAMPSHIRE DEPARTMENT OF LABOR

The NHDOL monitors employers to make certain that they are in compliance with the state's labor laws, including minimum wage, overtime, safety issues and worker's compensation. Each year the New Hampshire Department of Labor ("NHDOL") publishes a Fact Sheet of the "Top 10 New Hampshire Labor Law Violations." The most recent list published by the NHDOL says that the number one labor violation is misclassification of employees as independent contractors and the related failure to secure workers' compensation insurance pursuant to RSA 275: 42, I and II and RSA 281-A5.(fn 4 ) It remains unclear whether these violations are a result of willful misclassification on the part of employers to avoid expenses associated with employees (unemployment compensation, workers compensation, minimum/overtime pay requirements, etc.) or simply mistakes dueto the challenging standards of the law. RSA 275:4 provides that, to be classified as an independent contractor, a worker must meet ALL of the following criteria:

1. The worker must possesses or have applied for a federal employer identification number or social security number, or in the alternative, have agreed in writing to carry out the responsibilities imposed on employers; 2. The worker must have control and discretion over the means and manner of performance of the work, in that the result of the work, rather than the means or manner by which the work is performed, is the primary element bargained for by the employer; 3. The worker must have control over the time when the work is performed, and the time of performance is not dictated by the employer. However, this does not prohibit the employer from reaching an agreement with the worker as to completion schedule, range of work hours, and maximum number of work hours to be provided by the person, and in the case of entertainment, the time such entertainment is to be presented; 4. The worker hires and pays the person's assistants, if any, and to the extent such assistants are employees, supervises the details of the assistants' work; 5. The worker holds himself or herself out to be in business for himself or herself; 6. The worker has continuing or recurring business liabilities or obligations; 7. The success or failure of the worker's business depends on the relationship of business receipts to expenditures; 8. The worker receives compensation for work or services performed and remuneration is not determined unilaterally by the hiring party; 9. The worker is responsible in the first instance for the main expenses related to the service or work performed. However, this does not prohibit the employer or worker from providing the supplies or materials necessary to perform the work; 10. The worker is responsible for satisfactory completion of work and may be held contractually responsible for failure to complete the work; 11. The worker supplies the principal tools and instrumentalities used in the work, except that the employer may furnish...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT