Joseph is a graphic designer who works 20 hours per week from home for a company based in another city.
He determines his own working hours and location, pays his own taxes and insurance, and has other clients, but participates in regular meetings with the company and works closely with clients on their behalf.
Should Joseph be an employee or a contractor?
It’s not always clear, particularly for a small business, on whether you should bring on an independent contractor versus a part-timer. The changes coming, as a result of Health Care Reform, regarding coverage of benefits for certain part-time employees (generally those who work more than 30 hours per week, on average) will likely re-start the debate.
4 tips to help keep you from going wrong
Careful planning is vital, however, as misclassification of this group is very costly. Here are four tips to help you avoid making the wrong decision:
1. The company’s right of supervision and control over the worker is the critical issue. Many of the other factors are ways to hide or to uncover evidence of control (or the lack of it). Always focus your attention on the control factor.
2. Start your analysis by determining whether the worker will be integrated into the company’s workforce and operations.
a) If the worker is not integrated into the company’s operations and the right of control is not obviously apparent (no training, no work hours, no reports), you are reasonably safe as long as the relationship is short-term and the independent contractor has other customers.
b) If the worker is integrated into the company’s operations, the company is at risk (because control is likely to be inferred from integration) unless several factors point strongly in the direction of independent contractor status. Look for evidence the worker is engaged in a distinct business or occupation requiring specialized skill.
3. Be aware that the status of a particular worker usually lies somewhere along a continuum. Your goal is to avoid obvious misclassifications and narrow the area of uncertainty.
4. The decision to hire an independent contractor represents a calculated business risk. Assess the risk of misclassification, including the dollar amount of payment and duration of relationship, probability that worker will voluntarily pay income tax withholding and social security self-employment tax, risk of liability for workplace injury, etc.
How much control does the worker have?
There are also common law tests and Internal Revenue Code tests that can aid in determining the classification. The purpose of these factors is to attempt to determine whether the employer has the right to control the worker, how, when and where the work is performed, and the amount of investment the worker has in his own business.
The higher degree of control the employer has over the worker, the more likely the IRS will classify the worker as an employee. These factors are highly subjective.
Often a written agreement is created between an employer and an independent contractor. A written agreement does not prohibit an examination of the facts to determine whether the performance of the services is subject to control or direction of the employer.
If the examination shows either the exercise of or the right to exercise such control or direction, then the worker would be considered an employee and not an independent contractor. It is immaterial if the services are performed on a full-time, part-time or casual basis.
This is not to say that a written agreement with a worker classified as an independent contractor is not a useful tool. In addition to confidentiality agreements and no-compete clauses, information in the agreement establishes the conditions of employment so as to provide a case for the designation of a worker as an independent contractor.
Following the independent contractor agreement
Even if the Independent Contractor Agreement sets forth conditions similar to those required by the IRS or other governmental agencies, employers have to follow those conditions so that in the event of an audit the terms of work actually being performed are in line with the Independent Contractor Agreement.
In the scenario above with Joseph, it would appear he is mostly likely an independent contractor, and as long as there is a strong written agreement in place, the company he works for is mostly safe, assuming the other criteria mentioned are met. A business owner would be wise, however, to consult a professional advisor when making these decisions about whether or not a worker is a part-time employee or a contractor, and of course, be sure to follow the guidelines on an ongoing basis. And as things change in the working relationship, be sure to revaluate the status often.
Better to be safe than sorry, as they say.