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Tuesday, May 29, 2018

Small Business Blog: How does your business classify its workers? (employees vs. independent contractors)

The distinction between employees and independent contractors is not always clear. The consequences of classifying a worker as an independent contractor can result in either a huge tax-saving boon or devastating economic losses for the employer. As a business owner, you may be surprised by the frequency in which this issue arises. Whenever you hire an intern, a part-time worker, a full-time worker, a graphic designer, a cleaning service, a business consultant, or even accept volunteers, you will be faced with this question. Here we discuss when you should classify a worker as an employee and when you should classify the worker as an independent contractor.

Why does it matter?

  1. It matters because if you misclassify a worker, you may incur thousands of dollars in fines plus back taxes for the taxes you would have paid had you properly classified the worker as an employee.
  2. It matters when a worker gets hurt on the job. An employee can file a workers’ compensation claim, which is often less costly than the lawsuit an independent contractor would file. Independent contractors cannot claim workers’ compensation benefits.
  3. Employees are protected by several federal and state employment and labor laws including employment discrimination laws.
  4. Employees are entitled to benefits and overtime pay, and they may join a union. Independent contractors do not have access to these benefits.

Worker classification is complicated because the IRS, the Department of Labor’s Fair Labor Standards Act, and courts balance a series of factors when deciding that a worker is an employee or an independent contractor. There is not one specific rule. Whether you are hiring your first worker or your tenth, contact a professional to make sure you are properly classifying your workers.

The IRS uses common law principles that look at the level of control an employer has over the work performed. The IRS considers the following three categories:

  1. Behavioral Control: The employer controls when and where the worker performs the work and what tools the worker uses. The employer trains the worker on the procedures and methods the worker should use to complete the job. The employer gives detailed instructions and periodic evaluations to the worker.
  2. Financial Control: The employer owns and pays for the equipment needed to perform the job. The employer controls or impedes the worker’s ability to work for other companies. The employer pays regular wages.
  3. Relationship of the Parties: If the relationship is ongoing instead of short-term and project-based, the IRS may classify this as an employer-employee relationship. The worker performs services that are an integral part of the regular business of the company.

The Fair Labor Standards Act uses the “economic reality” test, where if a worker is treated like an employee and the worker depends on the company as its primary source of income, the worker may be classified as an employee.

Whether you are working with employees or independent contractors or volunteers, get a signed agreement in writing that clearly defines expectations, payment terms, content ownership, and more. At Kimberly Shin Law Firm PLLC, we create customized employment agreements, independent contractor agreements, intern and volunteer agreements, employment manuals, and employment applications for your small business.





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