Navigating the Fine Line Between Independent Contractors and Employees

5-minute read

It’s about control over how the job is done, the opportunity for someone to make a profit vs. losing money, and the skills and materials required. It’s also about the degree of permanence of the working relationship, and how integral the work is to your business.

We’re talking about the half-dozen factors that employers will once again need to consider in determining whether they are able to hire an independent contractor or whether the rules dictate otherwise.

These rules – announced in early January by the Department of Labor and set to go into effect March 11 – could mean that millions of gig workers, janitors, home-care workers, construction workers and truckers would be considered employees rather than independent contractors.

The rules, everyone agrees, are likely to significantly increase labor costs for employers and create HR nightmares over potential employee misclassifications.

The rules about hiring independent contractors are likely to significantly increase labor costs for employers and pose liability risks.

As a result, employers may face increased liability risks, including class action lawsuits or regulatory sanctions and fines for not providing required benefits and protections to workers.

If a company is found in violation, the IRS may impose any number of penalties including:

  • Retroactive payment of back taxes for the individual.
  • Interest calculated from the moment when payments were due.
  • Fines of up to 100% of the amount due.
  • Retroactive contributions to the individual’s Medicare and Social Security, federal and state unemployment taxes, and workers’ compensation benefits.

It is, in other words, not a good idea to ignore these rules.

Who is an Independent Contractor?

As a general rule, the more an employer controls the work of an individual, the more likely it is that the individual would be viewed as an employee. Employers are to a point able to direct the result of the work done by independent contractors, but not the means and methods by which they choose to accomplish each assignment.

In addition, employers would not be able to supervise a contractor’s work as they would monitor an employee’s performance, nor do they usually provide the supplies or tools the contractor needs to complete its tasks.

In contrast, employers can exercise a higher degree of control over their employees. This includes not only the jobs employees perform but also the processes and tools they must use to complete them.

There are also compensation differences between the employer-contractor relationship and the employer-employee relationship. A contractor’s claim for compensation is tied to its ability to meet the expectations of its contract. It is possible for an employer to refuse compensation to a contractor that fails to deliver the services it was hired to provide. On the other hand, an employer’s ability to refuse paying employee wages is limited and often illegal.

Protection Against Misclassification

Employers planning to hire an independent contractor should be aware of common mistakes in order to avoid potential penalties.

An independent contractor agreement is a good first step. This document should contain a description of the services the individual will perform, how long the task should take and how the person will be paid. This agreement can serve as evidence of the person’s intended status with the employer, should an investigation ever arise.

It is also smart to screen independent contractors before hiring them to complete a project. It’s best to develop a formal interview questionnaire to obtain the information needed to prove the person’s status. Here are some good questions to ask:

  • Do you have a legal entity established for your business?
  • Have you filed a fictitious business name (doing business as…)?
  • What is the address and telephone number of your business?
  • How many employees do you have?
  • What professional licenses do you hold?
  • What type of equipment and supplies do you currently own to complete work?
  • What additional equipment and materials will you need to complete the task and how do you plan to obtain said materials?
  • What type of insurance coverage do you possess to cover your business?
  • Can you provide professional references?

The pivotal detail to remember is that as the employer’s control increases, the likelihood that the individual can be classified as an independent contractor decreases. For this reason, it pays to be extra-careful when deciding to hire someone as an independent contractor.

The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. For more information, visit our website or call 877-440-3304.

This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.

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