Employee or Contractor? Questions an Employer Should Ask Themselves Before Classifying

There have been numerous articles covering the distinction between classifying workers as employee or independent contractors. And although many companies prefer to classify workers as contractors due to the lower costs, these many articles have also covered the risks of improperly classifying workers, including having to shell out for back pay, interest, and/or tax penalties. What some company founders may not realize is that there are different tests for classifying workers as employees or contractors, depending on which agency you’re dealing with. For example, wage-hour law violations are dealt with by the Department of Labor, whereas improper classification for employment tax purposes are policed by the Internal Revenue Service; both agencies have different tests, as though both tests share many common factors, both also have factors unique to each. In addition, each state may have differences in their tests; state revenue agencies may share a test with their state’s department of labor, or each agency may have different tests as well. If a company founder is looking to do an analysis of how a potential worker should be classified, there are a number of questions that should be asked. – What is the intent of the parties? — Although government agencies focus more on the economic reality of the relationship rather than what the parties call it, the intent of the parties can be used to help push a close analysis one way or the other – Does the worker have an independent business or perform this type of work for other entities? — A worker that has their own business through which they perform the work contemplated for other companies is a classic image of an independent contractor. For example, your startup hires a graphic designer who has her/his own graphic design firm or practice through which they do design work for other companies. A contractor would have their own equipment, office, and/or employees. – Is there a risk of profit or loss for the worker depending on how the project turns out? — A worker who is responsible for covering their own costs for working on the project, and could incur a loss if their costs were to spiral out of control, is indicative of a contractor. – Who controls how the work is completed? — If the employing company can direct how the worker performs the work, including setting hours when the worker is to work, requiring the worker to come into the company’s place of business when not necessary to complete the project, and micromanaging the steps or processes employed to complete the work, that looks like an employer-employee relationship. – How is the worker paid? — Contractors typically invoice for work performed and are given 1099s; contractors are also typically hired on a per-project basis.

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