Are Your Employees Really Independent Contractors?

Wednesday, March 21, 2012 - in Human Resources - Blog
  Many employers classify certain positions under the "independent contractor" classification and then feel confident that they are not obligated to pay any employment taxes or adhere to the myriad of employment laws out there.  This classification does not save the employer from the legal obligation they have when there is actually a real employer-employee relationship under the Fair Labor Standards Act (FLSA) and the IRS.  There have been many cases in the recent past in which misclassified independent contractors were wrongfully terminated or not paid for overtime and the courts found the business relationship was in fact one of an employer-employee.  Once it is established that an employer-employee relationship exists, the IRS also takes a seat at the table with palms outstretched.  As we all know, we must pay income taxes, Social Security and Medicare on all of our employees.  Forget about walking away from the IRS once the Independent Contractor status is taken away!!

 With the risks of incorrectly using the independent contractor status in mind, we must consider the degree of control and level of independence under the following three categories...

Behavioral, Financial & Type of Relationship.  The employer/business must ask the following questions when determining that status:

  • The nature and degree of control with regard to who makes the schedule, who is responsible for quality control, does the worker work for any other companies, etc.?
  • The amount of the worker's investment; do they purchase and use their own tools or do they get reimbursed for their supplies?
  • How long will the relationship last? 
  • Does the worker earn a profit?  Is there a potential for the worker to experience profit and loss?
  • Does the worker advertise independently?

If after the above questions are asked and it is still difficult to definitively make that distinction between employee and independent contractor, businesses may also complete and file a Form SS-8 to have the IRS make the determination for them. 

Justine Lohelein 3/21/2012

Comments:

Response to: Are Your Employees Really Independent Contractors?
Wednesday, March 21, 2012
Andy says:

I have seen too many employers misclassify their employees as sub contractors. Once the employee files for unemployment insurance, the game is over - between the audits, penalties etc... they are just kidding themselves temporarily. This doesn't include the risk factor that an "independent contractor" has an accident and all of sudden claims they should've been covered on workers' compensation. There are plenty of law firms that would take that case. Proper classification makes sense!

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