Small Business Owners – Beware! If you own or manage a small business you live in a world of substantial legal risks and increasing complexity. It is easy to find examples of practices that once have been common but now could give rise to employment lawsuits. One such example I often hear is "I’ll just call my workers independent contractors and avoid the hassles of employees."
Many businesses make the mistake of treating employees as an independent contractors so they can save money on taxes, red tape and benefit coverage. The risks associated with this approach is often not worth it.
Businesses that misclassify workers often find themselves embroiled in wage and hour lawsuits or workforce development audits. These businesses could also face tax penalities and lack of insurance coverage in key liability situations.
Often, businesses treat employees as independent contractors because they fail to fully understand the distinction between the two categories. The most important difference is whether or not you have the right to control the work. Other factors, such as where the work is performed, who provides the equipment, how payment is made and if there are set hours, also play an important role.
Generally, an employee is someone whose manner of work the employer has a right to control, even if the employer does not actually exercise that control. True employees are sometimes known as W-2 employees because of the W-2 form issued to them for federal income tax purposes.
On the other hand, an independent contractor is someone you engage to perform a certain task, but whose manner of work you do not have the right to control. You have the right to tell your independent contractor what it is you want done, and you remain free to dismiss them if you do not like the work (depending on your contractual arrangement). Ultimately though it is the results you are interested in. The manner in which the results are accomplished is up to the independent contractor and is not subject to your control. An independent contractor is given a 1099 form to report income for federal tax purposes.
If you have questions about whether to treat workers as employees or independent contractors be sure to consult with an employment or tax lawyer. This area of the law is more complicated than just the control issue. Tax lawyer Tripp Atkins is currently analyzing the 20-factor IRS test for determining an employee or independent contractor on his blog.
The safest course is to treat workers as employees if the workers’ status as an independent contractor could reasonably be questioned.