 Contractor or Employee?
| The proper labor classification of employees is a frequent problem for new business owners. The decision to classify a worker as an "independent contractor" (IC) provides many benefits to the employer if properly made:
The employer is not responsible for any payroll taxes or employment insurance on wages paid.The employer typically is not expected to provide benefits to a contractor.The contractor generally has limited recourse against the employer with respect to workplace lawsuits.
These 3 advantages alone oftem tempt employers to use the "IC" classification. However the IRS and state labor boards use a very restrictive definition when determining if an employee meets the guidelines of an independent contractor. Employers who improperly classify employees as contractors are at risk of lawsuits and penalties for back wages and payroll taxes.
To determine whether an individual is an employee or an independent contractor under common law rule, the relationship of the worker and the business must be examined. Common law means that it's not a written law per se, but still enforceable based on custom and precedent, such as the outcome of court cases (its also called case law). In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. Generally, if any one of the following three requirements are not evident, the worker will be considered a statutory employee:
Behavioral - The employer may not exercise any control over the worker with respect to hours and time worked, or manner in which work is performed. For example, the employer may not stipulate that the employee must start work at 9am or work until 5pm. The employer may not mandate instructions or behavior, such as order of work flow, sequence of events, or specific method to complete a task.Financial - The rules about financial control are varied, depending on the nature of the work. However, an IC usually is paid "piecemeal" or per job, not by a measurement of time worked, such as hour, day, or week. Independent contractors generally may not be restricted in the market they serve. In other words, they should be free to offer their services to any buyer.Relationship - The employer-worker relationship must not be of permanent or business-critical nature. Hiring a worker with the expectation that the working relationship will continue indefinitely, rather than for a specific project or period, will generally be considered evidence of intent to create an employer-employee relationship. Also, if a worker's performance is a critical aspect of an organization's product or service, it is likely that the organization will exert too much control over the worker to use an IC classification.
If you have any questions regarding the proper classification of an employee, you should contact the IRS, state labor department, or a professional to obtain the correct classification. |
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