Anyone who owns a business and has ever hired or retained someone to work for the business likely has confronted this question: employee or independent contractor? It seems like an easy decision, and for some, it may be. For most, however, the risks of getting this wrong are significant and likely far outweigh the benefits.
At its core, an independent contractor is someone who is self-employed. True independent contractors generally set their own hours, control their own work, and are free to hire and fire their own personnel. The problem is a worker isn’t an independent contractor just because you’ve classified him that way, even if he agrees and even if you have a written contract.
The law determines who is and isn’t an independent contractor. If you get this wrong, and either a government agency gets involved or the individual decides he would have preferred to be considered an employee (because of overtime, benefits like stock options, workers’ compensation, or any number of other reasons), you will pay for it. Even worse, misclassifying someone may lead to personal liability.
The best advice is if you are planning to retain someone as a contractor, get it right. A true independent contractor is in business for herself. This means:
The individual sets her own rate of pay (it’s not a salary).
The individual controls where she works, how she works, when she works and the tools and equipment she uses. So, if you are setting her hours, providing her with an office and equipment, you may have a problem.
The individual isn’t trained by you.
The individual doesn’t receive benefits. She’s paid for her services.
The IRS recently announced a new program, the Voluntary Classification Settlement Program (VCSP), which is designed to enable employers to voluntarily reclassify their workers for federal employment tax purposes. California recently enacted legislation authorizing sizable civil penalties for willfully misclassifying someone. The penalties can be as much as $25,000 per violation.
Retaining individuals as contract labor may be appropriate for you. But, in my experience, it is more often the exception than the rule.
Andrew Gould is a labor and employment attorney, certified by the Texas Board of Legal Specialization, with the law firm of Wick Phillips Gould & Martin, LLP. This article does not attempt to offer solutions to individual problems but rather is informational only. Questions about individual problems should be addressed to the employment-law attorney of your choice. To contact Gould or to suggest topics, email: Andrew.email@example.com. Contact firstname.lastname@example.org with comments and/or suggestions for future topics.