IS IT TIME TO RE-ASSESS THE STATUS OF YOUR BUSINESS’ INDEPENDENT CONTRACTORS?
Independent contractors (“I/C”) have become a growing resource for many companies. There are certain benefits to hiring an I/C instead of a new employee. As you may have experienced an I/C often provides a company with the opportunity to obtain services from a highly qualified individual at a much lower cost than an employee. With an I/C, your company is not responsible to withhold taxes, may avoid paying minimum wage, overtime, and its portion of social security and medicare taxes, as well as unemployment and worker’s compensation insurance. Also, unless otherwise agreed to between the company and the I/C, your company will typically not have to pay health benefits, vacation time, sick leave, and other benefits, that otherwise would be applicable to an employee.
Sounds great, right? Not so fast. Unfortunately the growing use of I/Cs has come under heightened scrutiny from governmental agencies. State and federal governments have raised their level of scrutiny of I/C classifications, classifying many workers as employees rather than as I/Cs.
LIABILITY FOR MISCLASSIFICATION
If your company misclassifies an employee as an I/C (or consultant), the liability can be significant. Misclassification, whether intention or not intentional, may lead to heavy fines and penalties, and litigation expenses against your company. In addition, liability may arise under various federal and state labor, employment and tax laws, such as New York State Labor Law (relating to payment of wages, overtime and unemployment compensation), and the New York State Worker’s Compensation and Disability Benefits Law (provides for payment of benefits when employees are injured on the job).
Unfortunately, even if your company classifies a worker as an I/C, they may still file an application for unemployment benefits, which is the biggest source of classification audit activity. If the worker is determined to be an employee, not only can your company be responsible for unemployment benefits, the state will likely look into the classification of any other I/Cs your company may use.
WHO QUALIFIES AS AN INDEPENDENT CONTRACTOR?
Just because you hired an individual as an I/C, or you consider a worker an I/C, does not mean that the various governmental agencies will agree. There is no single factor that determines whether a worker is a I/C or employee.
Proper classification of a worker is complicated by the lack of a precise definition of an I/C. As a preliminary matter, the law will consider how much control, direction and supervision your company exercises over the worker. Generally speaking, the more control your company has over how work is accomplished, the more likely the worker will be considered an employee. On the other hand, if your company simply specifies the end product and the I/C controls how the work is performed, then it is more likely that the worker will qualify as an I/C.
12 TIPS TO REDUCE LIABILITY
Below is a list of 12 tips to help reduce the risk of misclassification, and to ensure the status of a worker as an I/C.
1. Have a written I/C agreement with the I/C, identifying the worker as an I/C. Although such an agreement is not conclusive, it can be good evidence of an I/C relationship.
2. The Independent Contractor agreement should describe the specific service(s) to be performed by the worker, and the amount of compensation and method of payment. Payment should be based upon completion of tasks or assignments rather than on a periodic basis (which is more evident of an employee/employer relationship). The agreements should provide for the I/C to submit invoices to the company for the services provided.
3. Do not pay the I/C’s expenses directly; let the I/C pay its own expenses, and reimburse them as appropriate.
4. Do not pay the I/C from a payroll account used to pay employees.
5. Do not give the I/C the same or similar benefits the company would give to an employee.
6. Do not classify a worker as both an I/C and employee during the same tax year – this is an audit “red flag”.
7. Allow the I/C to work their own hours and to work outside of the office. A significant sign of I/C status is where the I/C keeps a place of business separate from the company and uses his/her own equipment and supplies.
8. Company may set a deadline for completion of projects, but should allow the I/C to set his/her own work schedule and to determine and control his/her method, order and sequence of completing the work.
9. Company may hire an I/C with respect to various projects, and use the I/C regularly, but should not provide for an indefinite term of work; company should use specific start and end dates for projects worked on by the I/C.
10. Have the I/C establish his/her own business entity and carry its own insurances.
11. Have the I/C use his/her/their own business cards, stationary and invoices with their company name.
12. Allow, and do not prevent, I/C from performing services for other companies.
If you need any assistance with your company’s use of I/Cs, we would be glad to assist you.
Learn more about our employment law practice.