Implications of improper classifications for independent contractors

Posted by: Joel Capperella

Today, I came across two articles that underscore the very nature of what we’ve been discussing here at The Seamless Workforce. They are seemingly unrelated at first glance, but considered together, they should serve as a wake up call for any organization that is doing business in a cash-strapped state.

First, we have the case of a Mr. Elienberg of Roxbury, Mass., which was highlighted in Tuesday’s Boston Herald. Mr. Elienberg is the face of a class-action lawsuit against broadband company RCN, alleging that RCN abused his classification as an “independent contractor” — along with over 1,000 other RCN contracted employees.

Then, there is today’s Wall Street Journal article about the revenue shortage facing some states, and the dilemma of potentially raising state income, sales, and other taxes to compensate.

So, how are the two related?

Let’s go back to Mr. Elienberg’s case. While the article doesn’t report on this aspect of the story, one has to ask what the tax repercussions are going to be if the court finds in favor of Mr. Elienberg. Quite likely, it will be significant for Massachusetts — the state will collect back payroll taxes.

On the flip side, RCN will most likely incur fees for the back taxes, as well as potential punitive damages for violating the policy. And because RCN does business in states up and down the East Coast, it is likely other states will decide to audit the independent contracting practices of RCN.

The debate often turns to the necessity of raising or lowering taxes, but the fact is that there are plenty of state tax codes being examined by revenue departments of every beleaguered state in search of a minimally tapped revenue stream. There is no need to pass new legislation, no need to get a referendum passed, and no humiliating headlines about increased taxes. Instead, there is just unencumbered revenue already entitled to the state.

The message for corporations in states such as these is simple: Conduct your own audit and get your house in order as soon as possible.