Careful How You Label Your Contractors and Employees

Like many startups in the city, online fitness community BuiltLean relies on a collection of contractors to tackle projects from video production to Web development. “I think they enjoy the flexibility of freelancing,” said founder and Chief Executive Marc Perry, who turns to sites like oDesk for the talent he needs to keep his traffic at 1.2 million page views a month.

Someday, the former hedge-fund investment analyst hopes to “scale” the company enough to rely on regular, full-time employees. Meanwhile, Mr. Perry finds that working with freelancers brings savings, such as lower office-space costs.

There’s no doubt it’s cheaper and easier in some ways to employ a “contingent” workforce made up of freelancers, contractors and temps. The trend picked up during the recession, when hiring budgets were tight.
But for employers who don’t handle the paperwork carefully, there are big risks. Officials at the state Department of Labor and other agencies have been cracking down more frequently on misclassification. That is when companies treat workers whom officials say should technically be employees as contractors—or don’t pay them on the books at all.

“At the state and federal levels, there has been increased enforcement with respect to misclassification of employees as independent contractors,” said attorney David Fisher, a member of the labor and employment group at Davis & Gilbert in Manhattan.

Mr. Perry consults with legal counsel regularly about how to handle the hiring paperwork and work assignments for his contractors. When new freelancers join his 12- to 15-person crew, he asks them to sign an independent-contractor agreement to make sure they understand their role. But he may be unusual.

In 2013 alone, the state’s Joint Enforcement Task Force on Employee Misclassification–made up of the Department of Labor and a posse of other government agencies–identified nearly 24,000 instances of employee misclassification by employers statewide, an increase over 2012, according to its recently released annual report. The Department of Labor responded to an initial inquiry but did not provide a representative to answer questions from Crain’s by press time.

The task force said it discovered $333.4 million in unreported wages and assessed nearly $12.2 million in unemployment insurance contributions. The cost for employers found to be violating the rules—and required to pay back wages and unpaid unemployment insurance contributions—can be hefty.

Mr. Perry consults with legal counsel regularly about how to handle the hiring paperwork and work assignments for his contractors. When new freelancers join his 12- to 15-person crew, he asks them to sign an independent-contractor agreement to make sure they understand their role. But he may be unusual.

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Jeffrey R. Ungvary

President

Jeffrey R. Ungvary