In many businesses, it can be difficult to see a difference between an independent contractor and an employee. They might even be working side-by-side, doing the exact same work. In fact, the IRS estimates that employers misclassify millions of workers nationally as independent contractors. A wrong categorization of the two might therefore seem harmless, but the legal implications of doing so are not.
As an employer, it’s vital to know the differences between independent contractors and employees and your legal obligations to both.
To determine whether or not a worker is an independent contractor, ask yourself a series of questions:
- Does the company control or have the right to control what the worker does and how the worker does the job?
- Does the company control the business aspects of the worker’s job, such as pay, expenses, or the purchase of materials?
- Is there a written contract or employee benefits such as a pension plan, insurance, or bonuses?
- Will the relationship continue, and is the work a key aspect of the business?
For your employees, you withhold income tax, Social Security, and Medicare from their wages; independent contractors are self-employed and are not subject to withholding requirements. Seemingly obvious, this difference is frequently cited as one of the most common payroll mistakes. Employees are likely eligible to receive unemployment compensation after being fired, while independent contractors are not.
Some employers intentionally misclassify employees to cut costs. FedEx notoriously cut its labor costs by nearly 40 percent by misclassifying drivers as independent contractors. In 2014 this scheme resulted in a $228 million settlement for the intentional misclassification of 2,300 workers. FedEx is still facing additional lawsuits. FedEx’s example illustrates the costs of mistakes. Federal and state agencies have begun seeking legal action at an increasing rate, and the fires and damages have been significant.
Employers should communicate the differences between independent contractors and employees to all workers when using the services of independent contractors. Given the fact that many independent contractors do similar, or even identical, work for employers, employees may question a difference in treatment. By outlining your legal obligations to both parties, you can avoid frivolous discrimination lawsuits and create a healthier work environment. Failing to address differences may give the illusion that you prioritize certain workers over others, whether through benefits, work hours, or enforcement of labor laws.
If you’re unsure about how to classify a worker, contact a Sioux City lawyer, Sioux Falls attorney, or an Omaha lawyer today. Don’t let misclassification sink your business.
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