Man Bites Dog: Reverse Misclassification

June 25, 2009 – 5:32 pm

The Old Worker-Status Horror Story –

In the hackneyed “dog-bites-man” version of the old worker-status horror story, a court of law reclassifies a company’s contract workers as regular employees. The court then orders the company to pay hundreds of thousands of dollars in back taxes, penalties and interest to the government. The court also finds that the misclassified employees are entitled to the same employee benefits that the company provides its other regular employees.

Reclassification horror stories like this are the primary reason why many companies use third-party employers of record — including our favorite, Solo W-2, Inc. — to mitigate the risks of co-employment. The overwhelming bias by companies is to ensure that every contract worker is either a legitimate business or the employee of a legitimate business.

In a reversal of the usual course of action, New York Attorney General Andrew Cuomo gives us the “man-bites-dog” version of the worker-status horror story. Cuomo announced recently that he wants to reclassify a lawyer as an independent contractor after six school districts originally classified him as a regular employee, entitling him to receive health benefits and a public-sector pension.

It is rare that the IRS or a court of law will actually reclassify an employee as an independent contractor because doing so would strip the employee of his or her government entitlements, including unemployment insurance and workers compensation, while yielding no net increase in the payment of payroll taxes and income tax withholdings.

In other words, if you are the IRS or a class-action attorney, there is money to be made by turning an independent contractor into an employee of the company where he or she works. But converting an employee into an independent contractor is usually pointless.

In this case, however, there is a financial incentive for the government to reclassify the worker as an independent contractor.

Several school districts had listed Attorney Lawrence W. Reich, a private practitioner since 1978, as a full-time employee, at one time or another over a period of 28 years. Reich accrued 42 years in the New York State and Local Employees’ Retirement System and, upon his retirement from the system in 2006, began collecting an annual pension of $61,459.

At issue is whether Reich perpetrated a ruse through which he enjoyed rights under the New York state retirement system that he would not be eligible for as a private practice attorney operating as an independent contractor. Reich claims through his attorney that there is no evidence to suggest that he was intentionally misleading anyone.

You can read more about this curious case online in the ABA Journal and in the web site of the New York State Office of the Attorney General.

James R. Ziegler