It is critical that business owners correctly determine whether individuals providing services to them are employees or independent contractors. In most cases the choice is easy: workers neatly fit within one category or the other. This edition of the HR Law Insider focuses on what to do when the choice is not so easy – when businesses need to carefully evaluate the pros and cons of their decision. As discussed below, making the wrong choice can be costly.
PROPER CLASSIFICATION: THE QUESTIONS EVERY BUSINESS MUST ASK
An employee is “a person in the service of another under any contract of hire, express or implied, oral or written, where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed.” In contrast, an independent contractor” is one who “in the exercise of an independent employment, contracts to do a piece of work according to his own methods and is subject to his employer’s control only as to the end product or final result of his work.”
Companies must evaluate the following before deciding whether a worker should be classified as an employee or as an independent contractor (or reclassified if classified incorrectly):
- Does the company have the right to control when, where and how the worker performs the job.
- Does the work require a high level of skill or expertise.
- Does the employer furnish the tools, materials and equipment for the job.
- Is the work performed on the employer’s premises.
- Is there a continuing relationship between the worker and the employer.
- Does the business have the right to assign additional projects to the worker.
- Does the business set the hours of work and the duration of the job.
- Is the worker paid by the hour, week, or month rather than the agreed cost of performing a particular job.
- Does the worker hire and pay assistants.
- Is the work performed by the worker part of the regular business of the company.
- Is the worker engaged in his/her own distinct occupation or business.
- Does the company provide the worker with benefits such as insurance, leave or workers’ compensation.
- Is the worker considered an employee of the company for tax purposes (i.e., the company withholds federal, state and Social Security taxes).
- Can the company discharge the worker.
- Do the worker and the company believe that they are creating an employer-employee relationship.
Answering the foregoing questions typically yield a clear result: the worker is either an employee or an independent contractor. However, in many cases, the result is anything but clear. In such cases, companies should consult legal counsel to discuss the facts and the pros and cons regarding the important decision to be made.
IMPROPER CLASSIFICATION: PENALTIES AND PAIN
Improperly classifying an employee as an independent contractor can result in significant IRS tax penalties for failure to pay payroll, social security, and medicare taxes, among other things.
Misclassifying an employee as an independent contractor can open a can of worms with the other government agencies, particularly if an agency believes that the business misclassified the employee solely to avoid providing government mandated benefits.
For example, in most instances employees have significantly more rights than independent contractors: overtime must be paid to non-exempt employees; employees are protected by the EEOC enforcement of Title VII and the Americans with Disabilities Act; employees are protected by the Department of Labor and OSHA laws; and employees have a number of other rights in the workplace which do not apply to independent contractors (e.g. workers compensation insurance and unemployment insurance benefits).
Classify workers correctly by evaluating — at the outset — their tasks and relationship to your company. Once you have performed a proper, careful, and supportable analysis, consult counsel if there is no bright line answer.
In future editions of the HR Law Insider, I will address easy ways to bolster any classification decision such that it will better withstand government or third party (e.g. plaintiff’s lawyer) scrutiny. This can be done via, among many other things, a good independent contractor agreement or by specifically delineating projects to be performed.
In the interim, sit back and enjoy a blast from the past about workin’ for a livin’. https://www.youtube.com/watch?v=9N2CANatVYQ