Increasing your Staff?  Classify them correctly as Independent Contractors or Employees

Most business owners, at some point in the life of their business, will bring on help in order to run or grow the company. Some owners may be looking for help only a few hours a week while others may be creating a sizable enterprise. Regardless of the circumstances, any company that seeks to pay individuals for their labor must decide if that worker will be an employee or a contractor.

Employment is presumed by the government

Over the years, federal and state legislatures have enacted a comprehensive set of laws designed to protect employees. As a result, in a dispute between the company and the worker, a governmental agency is likely to presume that the worker should be classified as an employee, giving the worker substantial legal protections, and making the hiring company subject to these laws:

  • Minimum wage and overtime requirements pursuant to the Fair Labor Standards Act (FLSA) and state and local laws
  • Statutory protections from discrimination and harassment pursuant to Title VII of the Civil Rights Act, the Age Discrimination in Employment Act (ADEA), and the Americans with Disabilities Act (ADA)
  • Statutory protections related to health, safety, and insurance pursuant to the Family and Medical Leave Act (FMLA), the Occupational Safety and Health Act (OSHA), the Employment Retirement Income Security Act (ERISA), and the Patient Protection and Affordable Care Act (PPACA)
  • Protection to act in concert with co-workers to improve their working conditions pursuant to the National Labor Relations Act (NLRA)

Classifying workers as Independent Contractors

In addition to avoiding oversight by the agencies administering the above-listed laws, many business owners see numerous benefits in engaging their workers as independent contractors, rather than hiring them as employees.

First, contractors are ineligible for employee benefits, such as health insurance, retirement plans, stock options, paid vacations, sick days, life insurance, disability insurance. The hiring company is not required to cover contractors under their workers’ compensation or unemployment insurance policies. This means less cost for the company and less effort to administer these programs for the worker.

Additionally, the hiring company can avoid tax obligations, as it is not required to withhold or pay payroll taxes for independent contractors.

And, while this may not apply to all companies seeking to hire workers, independent contractors have no legal rights to collective bargaining, as employees do.

Balancing Test

A governmental agency is likely to look to numerous factors to determine if a worker should be classified as an employee or as a contractor. When you bring on a worker, consider these tests so that you make the decision that is in the best interests of your company, but also the one with the least risk.

YES responses to the following questions will lean toward the worker being considered an independent contractor. NO responses will indicate an employer-employee relationship. Keep in mind that none of these are controlling, but when all of the circumstances are considered, where does the balance tip?

CONTROL
Does the worker have the right to accept, reject, or ignore any work opportunity offered to them? Do they control if, when, where, how, and for whom they will work? Do they have freedom to work for your competitors? Are they subject to minimal, if any, monitoring of activities or control over the details of their work?

PERMANENCE
Does the worker have a high degree of freedom to exit the relationship? Is the worker engaged on a project-by-project basis (even if numerous subsequent projects), rather than in a relationship with no stated or anticipated termination?

INVESTMENT
Does the worker invest in his or her own technology, software, facilities, equipment, or helpers? Is the worker responsible for all costs associated with the necessary resources to get the job done?

SKILL AND INITIATIVE
Does the worker have an advanced level of education and skill, or a license or certification, necessary to perform the work? Does the worker take initiative to complete the work, rather than wait for direction from a supervisor? Does the worker arrange for and fund the continued training needed to maintain or advance his or her skills?

OPPORTUNITY FOR PROFIT AND LOSS
Does the worker control the major determinants of profit and loss by (a) selecting among different jobs with different fees, (b) accepting as many jobs as they see fit, and (c) negotiating with customers over the fees they will be paid? Is the worker at risk of loss due to his or her own decisions?

INTEGRATION
Does the worker perform work that is outside the normal scope of the company’s business operations? Is the worker’s function to support the work of the company, and not to be another person providing the services that the company normally offers? Do the worker’s services insignificantly affect the company’s success or failure?

Several states use a stricter version of a test, leaning toward a broader definition of what constitutes an “employee” and being less friendly to companies who prefer to engage with contractors. Currently, those states are California, Connecticut, Florida, Illinois, Massachusetts, and New Jersey.

Mis-classifying can lead to harsh penalties

If your company is found to have mis-classified its workers, the financial costs and penalties can be significant. Claiming that you were unaware of your obligations to classify a worker as an employee will not get you off the hook. Consider what a company might be required to pay:

  • Back pay, including overtime compensation
  • Reimbursement of work-related expenses
  • Unpaid employee benefits, insurance obligations, disability payments, tax payments, and workers’ compensation obligations
  • Damages, penalties, interest, and attorney fees

How can you protect the company?

Clearly, taking a good look at the responsibilities and duties involved in the position in question is the first step. If you can definitively answer YES to the majority of questions above, then you might be safe in engaging the worker as a contractor. But if you cannot, then it’s a significant risk to do so and hiring the worker as an employee might be the best option for the company.

Another step, if you determine that classifying the worker as a contractor is the best way to go, is to have a formal agreement drafted that clearly outlines the roles and responsibilities of each party, and that unambiguously defines the nature of the relationship. Please understand that an agreement, even if signed by both parties, that says the worker is an independent contractor will NOT hold up if the reality of the situation proves otherwise.

This area of the law is very fluid right now and staying on top of the latest developments will reduce your company’s risk. If you are considering adding staff, schedule a consultation with me to discuss the situation and your options.

 

NOTE: THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES. IT DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. EACH SITUATION IS DIFFERENT. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE YOUR LEGAL RIGHTS, REMEDIES, AND DUTIES.

By Wendy M. Anderson, Esq.
Law Office of Wendy Anderson, PLLC
480-825-4509
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