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Employers Risk Heavy Financial Penalties for Misclassification of Employees as Independent Contractors

Connecticut employers with workers classified as independent contractors understand the thin line that often exists between determining whether an individual is properly defined as an employee or an independent contractor.  What many employers may not know is how severe a penalty they can pay for misclassifying employees as independent contractors, even where unintentional.   

Prior to Public Act 10-12, amending Connecticut General Statute § 31-69a, employee misclassification resulted in a single $300 civil penalty.  While numerous penalties could add up, and criminal penalties existed for certain egregious misconduct, employers did not face a significant financial deterrent.  Commencing late last year, however, the financial penalty increased to $300 per day, with each day of continued misclassification constituting a separate offense.  To put this into perspective, misclassification of just three employees for the month of August could subject an employer to a penalty of almost $30,000.  At that rate, penalties, even for small employers, can quickly skyrocket. 

Importantly, the increase is part of a broader effort to ensure proper employee classification, with numerous states and the federal government having either recently passed or currently seeking to pass similar measures.    

One of the problems for employers is that there is no uniform standard for analyzing independent contractor status.  In fact, different tests apply to determine whether a worker constitutes an independent contractor for purposes of unemployment compensation, workers’ compensation, the United States IRS, and other laws, such as the National Labor Relations Act (for unionized private sector employers) and the Municipal Employer Relations Act (for unionized public sector employers).  The tests are intensely fact specific and the determination of whether a particular worker is an employee or independent contractor can vary based upon even a seemingly minor change in the worker’s duties or responsibilities.

Hiring independent contractors can benefit an employer in a number of ways, including cost savings in that the employer does not need to provide coverage under unemployment or workers’ compensation insurance.  However, employers should take care, now more than ever, to ensure that workers are properly classified, as additional scrutiny is being placed on classification and heavy financial penalties are in place.