Most small business owners want to expand their businesses. With expansion comes the need for additional help. Before doing so, however, business owners need to understand the difference between an employee and independent contractor. There can be significant legal consequences for misclassifying workers as independent contractors when they are really employees.
What is an independent contractor?
Independent contractors, sometimes referred to as a freelancers or consultants, are self-employed. They are hired by a business to do a specific job. An independent contractor does not have the same tax status as an employee. A small business owner must pay taxes for their employees, including federal or state taxes, Social Security, Medicare and unemployment. An independent contractor is self-employed and is responsible for paying his or her own taxes. An independent contractor is also generally responsible for their own work space and supplies. These cost savings are why many businesses find hiring independent contractors appealing.
Misclassifying employees as independent contractors
Misclassifying workers as independent contractors, whether intentional or not, can have dire consequences for a small business. Some of those consequences include:
- Fees and fines
- Reimbursement of back wages
- Payment of back taxes and Social Security, Medicare and unemployment
The Internal Revenue Service provides information on its website to help small business owners determine whether their workers are employees or independent contractors. Generally, an individual is a contractor if he or she has control over how the work will be done. To help determine whether or not a worker is an employee or an independent contractor, businesses should ask the following questions:
- Does the business dictate when, where and how the worker works? The more control the business has over the work being done, the more likely the worker will be considered an employee and not an independent contractor.
- Does the business control the worker’s pay or limit the worker’s ability to contract with others? If so, the worker is likely an employee. Independent contractors are able to take on jobs with other companies and dictate their own prices.
- Is the worker key to the business’ success? If so, the worker is likely an employee.
- Is the worker’s relationship to the business expected to go on indefinitely? If so, he or she is likely an employee. Independent contractors are generally hired for a single task or for a temporary duration.
It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. The distinction is not always self-evident, and courts sometimes differ in their interpretation and application of the law. The problem for business is compounded by the scores of contingency lawyers now advertising to represent disgruntled workers in class action lawsuits. These lawsuits are being filed with increasing regularity, and often seek millions in claimed past due health, retirement and tax benefits plus statutory penalties. If you have questions or concerns about the status of your workers, contact an experienced business law attorney to learn more.