Are You Misclassifying Employees by Mistake?

July 2017
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Who helps you get the job done, employees or independent contractors? It’s important to know the difference, because misclassifying a worker as an independent contractor rather than an employee can be a big (and costly) mistake.

The case for independent contractors is strong; using contractors for your business can definitely save you money. Independent contractors typically don’t get benefits such as sick pay, vacation, or insurance benefits. You don’t have to pay social security taxes and you don’t have to provide workers compensation benefits, either. But there’s a possibility that your independent contractor is really an employee -- the line between the two is easy to blur.

Independent Contractor or Employee?

In order to be considered a true independent contractor, there is certain criteria your worker should meet. The biggest factor is the amount of control your worker has over the work.

Do you establish how and when the work will be performed, require set hours, or decide which materials/ equipment are used for the job? Do you set the work schedule or does your worker set his/her own hours? If you’ve got that level of control over your worker, they’re more likely an employee, not an independent contractor.

Does your worker do work for other people, or does he work exclusively for you? Independent contractors generally have multiple clients or are able to take on additional work.

Independent contractors generally provide their own work location, materials, and equipment. They meet deadlines but set their own hours to do so. Employees, on the other hand, work from your location with your tools and materials during the hours you set.

A real independent contractor will be given a job to do, and will have control over when and how the job gets done.

According to the Department of Labor, economic dependence is one of the largest factors determining if a worker is an employee or contractor. “If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.”

In other words, if you suddenly had no work for your contractor and he would have no other work coming his way and no way to pay the bills, he is definitely economically dependent on you. And he’s probably an employee.

If a worker provides work that is a key element of your business, they may be an employee. According to the Department of Labor, “If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer... Work can be integral to a business even if the work is just one component of the business and/or is performed by hundreds or thousands of other workers.”

If you frame residential homes, the work of a carpenter is integral to your business. That means your carpenter is more likely to be an employee. If you contract with a web professional to develop and regularly maintain your business website, that work is not integral to your business. That signifies an independent contractor relationship, instead.

When we find good people, it’s hard to imagine letting them go. According to the IRS, if you hire a worker with the expectation that the relationship may continue indefinitely, you may have an employee on your hands. A true independent contractor may work with you for specific projects or a period of time. But if you have an expectation that they’ll be with you for years to come, they are probably an employee.

It doesn’t matter what your contract or written agreement with your independent contractor says, here are seven signs they may actually be an employee.

  1. You supervise the work, which must be done exactly per your instructions.
  2. You provide the tools, equipment, and training to get the job done.
  3. You set the working hours and days.
  4. Your contractor only works for you, and has no additional work outside of your projects.
  5. You and your contractor have been working together for years, with no end date in sight.
  6. Your contractor receives an hourly pay.
  7. The work provided by your contractor is an integral part of your business.

If more than one of these signs describes your relationship with your independent contractor, you may actually have a misclassified employee working for you.

The repercussion of misclassifying an employee shouldn’t be taken lightly. You could face wage law violations, tax penalties, and penalties for violating state workers’ compensation laws. In some cases, you could even face criminal charges.

Using independent contractors and subcontractors can be a great way to cut costs and build your business. But be sure you’re not misclassifying real employees as independent contractors or it could cost you much more than you ever would have spent on paid time off and insurance benefits.

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