Many businesses prefer to hire independent contractors because there’s often less overhead and fewer expenses (i.e. taxes). However, classify an employee as an independent contractor and you’re in big trouble. Here’s how to legally differentiate between the two.
Who Controls the Worker?
This question is not always easy to answer. According to the U.S. Internal Revenue Service (IRS), evidence of the degree of control and independence of a worker falls into three distinct categories:
- Behavioral: Does the company control or have the right to control what the worker does and how she performs the job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? These include how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies.
- Type of Relationship: Are there written contracts or employee-type benefits such as a pension plan, insurance, sick pay, and vacation pay? Will the relationship continue indefinitely? Is the work performed a key aspect of the business?
Let’s look at an example involving Jim, John, and Joan. All three perform work for the ABC Repair Shop.
- Jim works at the front desk, earns $10 per hour, works from 9am to 5pm and takes complete direction for all of his duties from his supervisor.
- John is a mechanic, earns $15 per hour, takes some direction from his supervisor, but only works on an “on call” basis when needed, using the company’s tools.
- Joan is a master mechanic, paid depending on the complexity of the job, “generally” works from 9am to 5pm, but decides which autos to work on, uses her own tools, and takes very little direction from her supervisor.
Who is an independent contractor and who is an employee? Based on the information above, the answer is – it depends.
- Jim. It’s likely that Jim is an employee as he takes all direction from his supervisor.
- John. John could be an employee as he uses the company’s tools, but working on an on-call basis and only taking some direction from his supervisor makes his designation as an employee less certain.
- Joan. Joan is likely an independent contractor as her rate is not fixed, she uses her own tools, and takes very little direction from her supervisor.
Keep in mind that any change in Jim’s, John’s, or Joan’s duties or relationships with ABC could alter their status. According to the U.S. Department of Labor (DOL), misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers, and the entire economy.
If the DOL finds that a worker has been misclassified and denied access to critical benefits and protections to which they are entitled such as the minimum wage, overtime compensation, family and medical leave, and unemployment insurance – it can enforce employers to pay, not only going forward, but retroactively as well.
Case in point? Federal Express (FedEx) settled a long-running class action lawsuit with over 2,000 of its drivers. The reason? The DOL found that FedEx misclassified employees as independent contractors. The result? FedEx must create a $228 million fund to cover the claims.
Play it safe. Discuss employee classification issues with our experienced business attorneys who can guide you in determining which classifications are correct for your situation.