Disadvantage to a business of engaging independent contractors rather than hiring employees

In our industry, many businesses incorrectly designate their employees as independent contractors in order to avoid paying payroll taxes. They do not have an arms length business-to-business relationship with the massage therapists.

Here's some things they are exposing themselves to:
If the IRS decides that you have misclassifed an employee as an independent contractor, you
must pay the IRS all back-taxes owed, plus interest, plus penalty (12% - 35% of the total tax bill).
"If it finds a company guilty of misclassifying its workers, the IRS might require the company to pay all back withholding taxes plus interest, even if the misclassified independent contractors have already paid their taxes. The IRS might also levy huge fines and press criminal charges against the company officials. Once the IRS moves in, it opens the doors for the other agencies to collect their due. If there's anything left, the misclassified independent contractors might collect, too. Misclassified independent contractors have successfully sued for unemployment insurance, stock options, overtime pay, retirement benefits, profit sharing, disability payments, workers' compensation and more, in so-called "permatemps" and related lawsuits." (http://jobsearchtech.about.com/od/laborlaws/l/aa121800_2.htm)


If the relationship with the IC is terminated, and they file for state unemployment benefits, you are under an increased risk of state audits.

From http://www.insurevents.com/Articles/Employee%20Or%20IC.htm:
"Unlike an employee who is limited to workers' compensation benefits, an independent contractor can sue you for negligence if they're injured on the job. While most standard general liability policies will protect you from lawsuits for injuries to independent contractors, none will provide you protection for injuries to employees. Only a workers' compensation policy will do that.

"One of the key advantages of workers' compensation laws for an employer is the limitation on the right of the injured employee to sue the employer. In effect, the employer makes a trade with the employee – the employee automatically receives benefits for being injured on the job, even if the injury was partially or entirely the employee’s fault, and the employee gives up the right to sue to recover damages for those injuries in court, even if the employer was at fault. In today’s litigious society any protection against the open-ended damages that a court might award is a valuable benefit.

"Yet, if the injured person is an independent contractor, no workers' compensation benefits are received, which means that there’s no limitation on their ability to sue the business for whatever damages the court will award. In effect, when you elect to use an independent contractor instead of an employee, you might be trading immediate and limited savings on your workers' compensation premium for exposure to legal damages which could easily exceed the normal general liability policy limit of $1,000,000."

The Department of Labor can also get involved in questions of misclassification.
http://www.gao.gov/new.items/d07859t.pdf:
"Employee misclassification alone is not a violation of FLSA, but may contribute to FSLA minimum wage and overtime pay violations or violations of tax, workers’ compensation, or unemployment insurance laws. DOL investigations have identified FLSA violations associated with employee misclassification.

"For example, one misclassification case involved a valet parking company located in Arizona that provided services to local restaurants, sports venues, hotels, and theaters. In 2004, this company paid $66,947 in minimum wage and overtime pay back wages to 262 employees who had been misclassified as independent contractors.

"When reviewing the employment relationship, the DOL investigator found that the services provided by these workers were integral to the business, and that the employer had imposed strict policies and procedures to follow, and told them when they would work, where they would work, what their pay rate would be, and what uniforms they would wear. The investigator determined that the workers were not required to use initiative, judgment, or foresight to be successful as independent contractors, did not have any investment in facilities or equipment, and were not operating to make a profit.

This is also a good article: http://www.cbia.com/hr/hrissuesandlaws/indepcontractors.htm