I constantly preach to employers the importance of knowing the difference between an employee and an independent contractor.  In a recent arbitration in which I represented the employee, I received an $118,000.00 award for the client.  The client signed an “Employment Agreement” riddled with the terms “employer,” employee,” and “at-will.”  The employer even had the client sign a separate Non-competition/Non-Disclosure agreement.  But the employer never withheld taxes from the client’s pay and issued him IRS Form 1099s at the end of each year.  The employer also unilaterally changed the pay structure in the contract twice, despite a “no oral modification” clause, and never provided an accounting to the client to show he was receiving the amount of commissions promised in the contract.

The employer argued the client was an independent contractor despite the plain wording of the contract because he set his own hours, had his own delivery routes, and worked with little supervision.  Moreover, the employer argued my client waived the “no oral modification” clause because he did not complain about the changes to his compensation.

The arbitrators found my client was entitled to over $90,000.00 in unpaid salary and commissions.  They tacked on nearly $25,000.00 for the client’s overpayment of taxes based on the 1099s and the unpaid matching employer contributions.

This case was particularly egregious since I believe the employer knew what he was doing was illegal.  However, it highlights the importance of documenting all changes to an employment contract in writing and the perils of attempting to save a few bucks on taxes by classifying an employee as an independent contractor.  It may end up costing employers substantially more later on.

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