Mistaking an employee for an independent contractor could be a costly mistake – and it’s not exactly up to you to decide. Whether an individual is an employee or independent contractor will depend on the facts and circumstances of the situation, not the label used by the employer. Since employees are, in general, more expensive to hire due to employee benefits, and unemployment compensation contributions, there is preference for employers to misclassify employees as independent contractors.
This has become an increasing concern for government agencies, such as the IRS, who may determine someone you thought was an independent contractor is actually an employee. This could make you liable for expensive fines and open you up to litigation from the worker seeking compensation for benefits and protections they should have received by law.
Unfortunately, there is no standard test to determine if an individual is an employee or not, but there are some questions you can ask to help you determine which employer-worker relationship is occurring.
The main theme is control.
Generally, employers have more control over employees than they do independent contractors.
Financial control can be determined by how a worker is compensated and who provides the tools and materials. If the employer is making steady, reoccurring payments to the worker, they are most likely an employee. If the employer is making periodic, lump sum payments, they are most likely an independent contractor. Likewise, if an employer is providing the worker with the tools necessary for the job, they are more likely an employee as independent contractors generally own their own equipment, and invoice employers for materials they’ve purchased through their own vendor relationships.
Behavioral control could include how much discretion the worker has over when, and how long they work. Employees generally have a work schedule, or minimum hours they need to work each day/week, that can only be changed with explicit permission by their employer or an employer’s representative. Independent contractors usually have more freedom to move between projects as they feel necessary to complete the work in an agreed upon time frame.
Other factors for determining the employer-worker relationship are also taken into consideration. These often include how long the worker has had a relationship with the employer, and how integral the worker is to the operations of the business.
Employers should evaluate current working relationships regularly as they can change over time Employers that do not review their relationships with independent contractors run the risk of incurring expensive fines and litigation.
Should have any further questions about classification of a specific employee, or if you need to provide employee benefits and workers compensation, contact Concklin Insurance Agency to find the right insurance for your business.