Employee or Independent Contractors

Independent contractors perform compensated work for businesses and individuals, but they are not considered to he employees. The independent contractor relationship is usually created and based on an oral or written arrangement between the business and the contractor.  If the agreement is in writing, it may provide specific standards for the work in question, and establish the pay rate for that work. Independent contractors have more freedom over their work and the ability to contract with a range of businesses, but they do not receive many of the legal protections that employees do. The attorneys at The Gilliford Law Firm Chtd. can help you weave through the rules and regulations as to the use of Independent Contractors vs. the hiring of Employees.

Rights & Duties of Independent Contractors

As an independent contractor, the “hiring” company is not your employers, but your customer. Independent contractors have the right to decide when, where, and how a given project should be completed. If you are an independent contractor, the businesses hiring you are not entitled to direct your work. Generally speaking, your customer specifies the desired outcome of your work, and you have the freedom to determine how to achieve that outcome. While clients cannot directly oversee the work, that does not mean that independent contractors have free rein on all aspects of the relationship.

Defining the Independent Contractor

Under federal law, a worker is either an employee or an independent contractor. The determination is measured by the degree of control the employer has over the independent contractor, versus the degree of independence the independent contractor has from the employer. There is no single rule or test for determining whether individuals are employees or independent contractors. The determination is made by reviewing the situation as a whole, including many factors that you need to discuss with a competent attorney.

Make sure the independent contractor you hire doesn’t get reclassified as an employee.

A number of laws govern whether a worker is an independent contractor (IC) or an employee, and each of these laws has a different way of looking at the issue. For example, the IRS has one method of determining whether a person is an independent contractor, but your state workers compensation board may use a differen t test. Employers who don’t take the time to learn the rules before they hire an independent contractor can get hopelessly confused -- and this confusion can lead to trouble with one agency or another. If you want to avoid problems such as fines and taxes, know the rul es before you hire a worker.

Blaze a Paper Trail

Have all potential workers fill out a questionnaire regarding their independent contractor status before you hire them, and collect documents from them proving they are indeed independent contractors (for example, advertisements, invoices from other companies, profess ional licenses, and tax returns).

The IRS

The IRS is probably the most important agency to satisfy when it comes to classifying a worker as an IC. Under the IRS’s test, workers are considered employees if the company they work for has the right to direct and control the way they work -- including the details of when, where, and how the job is accomplished. In. contrast, the IRS will consider workers independent contractors if the company they work for does not manage how they work, except to accept or reject their final results.

COMMON QUESTIONS REGARDING INDEPENDENT CONTRACTORS:

What are the benefits of hiring independent contractors?

Businesses can usually save money by hiring I Cs instead of employees. In addition to salaries or other compensation, employers generally have to pay additional expenses for employees, including:

•  federal payroll taxes, including a 7.65% Social Security tax & a usually small (.08%) federal unemployment insurance tax
•  state unemployment insurance premiums
•  workers’ compensation insurance premiums
•  employee benefits, such as health insurance, paid vacations, sick leave, retirement benefits and life or disability insurance
•  office space and equipment

In addition, when you hire ICs instead of employees, you have reduced exposure to some types of lawsuits, such as those alleging job discrimination or wrongful termination. Finally, and most importantly for many firms, ICs provide a level of flexibility that can’t be obtained with employees. You can pay an IC to accomplish only a specific task, allowing your business to get specialized expertise for a short period. You need not go through the trauma (not to mention potential severance costs and lawsuits) of laying off or firing — when the IC’s job is finished, the relationship is over. Moreover, an experienced IC can be productive immediately, eliminating the time and expense involved in training employees.

What are the risks of hiring independent contractors?

Despite the advantages, many businesses are wary of using ICs because they have heard about or experienced the consequences of misclassifying as ICs workers who are, legally, employees. And it’s true that the consequences can be economically devastating. A business must pay the IRS all back taxes owed, with interest, plus a penalty of 12% to 35% of the tax bill.

Audits by state agencies are even more common than IRS audits. State audits most frequently occur when workers classified as ICs apply for unemployment compensation after their services are terminated. An investigation by your state u nemploymentcompensation agency will ensue, and you will he subject to fines and penalties if it determines that workers whom you classified as I Cs should have been classified as employees for unemployment compensation purposes. Another major disadvantage of hiring ICs is that they can sue you for negligence if they are injured on the job. This is something employees covered by workers’ compensation normally cannot do.

How do government agencies determine if workers are ICs or employees?

There is no single, clear-cut test for classification. Different legal tests for determining worker status are used by various government agencies, including:

•  the Internal Revenue Service
•  state Unemployment compensation insurance agencies
•  state workers’ compensation insurance agencies
•  state tax departments
•  the United States Labor Department
•  the National Labor Relations Board

Each of these agencies is concerned with worker classification for different reasons, and has different biases and practices. Each agency normally makes classification decisions on its own and need not consider what other agencies have done, which means that one agency can find that a worker is an IC while another decides that he or she is an employee. It’s also possible, though rare, for a worker to be deemed an IC in one state a nd an employee in another.