WORKER CLASSIFICATION – WHAT’S IN A NAME?

Employee or Independent Contractor?

Legal and regulatory debates continue to rage at both the state and federal levels, the topic … what workers may appropriately be deemed “employees” and which class of workers may be classified as “independent contractors”?

A worker’s classification has real world financial and other consequences for both the individual worker and the company utilizing their services. Independent contractors are not eligible for state or federal minimum wages. Additionally, they are not entitled to overtime pay, workers compensation coverage, unemployment insurance, or benefits. Effectively, independent contractors do not enjoy the protections of state or federal workplace law as do employees.

Employers are often tempted to seek grounds to classify workers as independent contractors rather than employees. Doing so relieves the employer of paying its share of employment taxes …  plus avoiding withholding and paying income, Social Security and Medicare taxes.

Employers are cautioned to be diligent in their research before classifying workers as independent contractors.

Misclassifying a worker may subject the business to significant financial penalties.

A prudent place to seek guidance is to review how the IRS determines whether a worker is an independent contractor or an employee. There are 3 relational categories to consider.

• Behavioral control − Does the company control or have the right to control what the worker does and how the worker does the job?
• Financial control − Does the business direct or control the financial and business aspects of the worker’s job. Are the business aspects of the worker’s job controlled by the payer? Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.
• Relationship of the parties − Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business

With the above as a guide, an employee is generally considered anyone who performs services under circumstances that the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed.

In contrast, independent contractors are typically people in an independent trade, business or profession in which they offer their services to the public. Workers often classified as independent contractors include truck drivers, home health workers, auto mechanics, carpenters, plumbers, painters, roofers, drywall installers, among others.

For more on how the above applies to your specific circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.