The misclassification of workers as “independent contractors” rather than “employees” is a growing problem in Iowa and across the nation. The misclassification of workers threatens Iowa’s economy, its businesses and its workers - which are the most important resource we have.
Iowa employers must report wages to Iowa Workforce Development (IWD) Operations Division and pay unemployment insurance (UI) tax on wages paid to employees as required. Iowa employers must generally withhold State and Federal income taxes, as well as withhold and pay Social Security and Medicare taxes.
When employers misclassify workers they:
- avoid paying taxes
- may avoid workers compensation coverage
- may fail to follow wage, contractor registration, labor laws and/or other employment laws
- may be more financially capable to underbid honest, law-abiding businesses that are paying all taxes owed
Employee vs. Independent Contractor Determinations
IWD investigates cases of potential misclassification on an individual basis and will issue a determination on whether the person providing service is an employee or an independent contractor.
When determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
- The right to control the work to be done and how it will be done is one of the main factors considered.
- The right to discharge a worker at will and without cause is also strong evidence of the right of direction and control.
The Internal Revenue Service (IRS) provides excellent resources to help determine the proper classification of workers as employees or independent contractors.
An archive of past misclassification cases heard by Iowa Administrative Law Judges is provided for your review.
Legal Impact of Misclassification of Workers
Intentional misclassification of workers is illegal. Misclassification of workers impacts the following Iowa laws:
- Unemployment Insurance Taxes: Iowa Code Chapter 96
- Income Taxes: Iowa Code Chapter 422
- Workers’ Compensation: Iowa Code Chapters 85-87
- Iowa’s Minimum Wage: Iowa Code Chapter 91D
- Iowa’s Wage Payment Collection Law: Iowa Code Chapter 91A
- Contractor Registration: Iowa Code Chapter 91C
- Federal Overtime Law: U.S. Code, Title 29, Section 207
- Federal Minimum Wage Law: U.S. Code, Title 29, Section 206
Intentional misclassification constitutes tax and insurance evasion. Employers misclassifying their workers may face the following consequences:
- penalties and fines
- interest on back taxes
- criminal charges under various laws