Employee or Independent Contractor
Many small businesses rely on independent contractors for their
staffing needs. There are many benefits to using contractors over
hiring employees: savings in labor costs, reduced liability, and
flexibility in hiring and firing.
However, in legal terms, the line between an independent contractor
and an employee is not always clear. Your workers are not
independent contractors because you say they are.
The distinction between employee and independent contractor is
important, since it affects how you withhold income taxes, withhold
and pay Social Security and Medicare taxes, and pay unemployment
taxes. In addition, misclassifying an individual as an independent
contractor may have a number of costly legal consequences. If your
independent contractor is discovered to meet the legal definition of
an employee, you may be required to:
- Reimburse them for wages you should've paid them under the
Fair Labor Standards Act, including overtime and minimum wage
- Pay back taxes and penalties for federal and state income
taxes, Social Security, Medicare, and unemployment
- Pay any misclassified injured employees workers'
compensation benefits
- Provide employee benefits, including health insurance, retirement, etc.
The most common method used to determine if you have an independent contractor or employee is the "common law rules"
- Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
-
Behavioral: Does the company control or have the right to
control what the worker does and how the worker does his or her
job?
- Financial:
Are the business aspects of the worker’s job
controlled by the payer? (these include things like how worker
is paid, whether expenses are reimbursed, who provides
tools/supplies, etc.)
- Type of Relationship: Are there written contracts or
employee type benefits (i.e. pension plan, insurance, vacation
pay, etc.)? Will the relationship continue and is the work
performed a key aspect of the business?
Businesses must weigh all these factors when determining whether
a worker is an employee or independent contractor. Some factors may
indicate that the worker is an employee, while other factors
indicate that the worker is an independent contractor. There is no
“magic” or set number of factors that “makes” the worker an employee
or an independent contractor, and no one factor stands alone in
making this determination. Also, factors which are relevant in one
situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree
or extent of the right to direct and control, and finally, to
document each of the factors used in coming up with the
determination.