As a business owner (or leader) it is becoming more and more critical to understand the “legal definitions” and interpretations of your staff. Often times we find discrepancies with what you might think is one thing when, by law, it turns out to be something different. This is very common issue when it comes to having “Independent Contractors” who may very well be “Employees” in the eyes of the law.
Take for example the ABC Repair Shop and see if you can spot who is who and how they ae viewed in the eyes of the law. In this story, we have Jim, John, and Joan. All three perform work for the ABC Repair Shop. Here are the brief descriptions of what they do and their reporting structure…can you spot the Independent Contractors and the Employees?
- Jim works at the front desk. He earns $10 per hour and works from 9am to 5pm. Jim takes complete direction for all of his duties from his supervisor.
- John is a mechanic. He earns $15 per hour but only works on an “on call” basis when needed. He takes some direction from his supervisor and uses the company’s tools.
- Joan is a master mechanic. She is paid depending on the complexity of the job and “generally” works from 9am to 5pm. However, she gets to decide which autos to work on, uses her own tools, and takes very little direction from her supervisor.
Based on the brief descriptions above, can you tell who is an independent contractor and who is an employee? Based on the information above, the answer is…it depends.
Today, many businesses prefer to hire independent contractors because there’s often less overhead and fewer expenses (i.e. taxes). However, if you classify an employee as an independent contractor you could find yourself in big trouble. Here’s a quick guide on how to legally differentiate between the two.
Who Controls the Worker?
This question is not always easy to answer but is very important to determining the work status of someone in your employ. According to the U.S. Internal Revenue Service (IRS), evidence of “the degree of control” and “independence” a worker has falls into three distinct categories:
- Behavioral: Does the company control or have the right to control what the worker does and how she performs their job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? These include how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies.
- Type of Relationship: Are there written contracts or employee-type benefits such as a pension plan, insurance, sick pay, and vacation pay? Will the relationship continue indefinitely? Is the work performed a key aspect of the business?
Now let’s get back to our example of the ABC Repair Shop. Based on the above criteria, did you figure out who is an “Independent Contractor” and who is viewed as an “Employee?” Let’s take a look at the answers and see why they are classified as such…
- It’s likely that Jim is an employee since he takes all direction from his supervisor.
- John could be an employee as he uses the company’s tools, but working on an on-call basis and only taking some direction from his supervisor makes his designation as an employee less certain.
- Joan is likely an independent contractor as her rate is not fixed, she uses her own tools, and takes very little direction from her supervisor.
An important consideration to keep in mind is that any change in Jim’s, John’s, or Joan’s duties or relationships with ABC could alter their status. According to the U.S. Department of Labor (DOL), misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers, and the entire economy.
Here’s the real issue for most employers. If the DOL finds that a worker has been misclassified and denied access to critical benefits and protections to which they are entitled, such as the minimum wage, overtime compensation, family and medical leave, and unemployment insurance, they can enforce employers to pay going forward AND retroactively.
To illustrate the impact this can have on a company, consider the case against Federal Express (FedEX). Federal Express settled a long-running class action lawsuit with over 2,000 of its drivers. The reason? The DOL found that FedEx misclassified employees as independent contractors when they really should have been treated a employees. The result? FedEx must create a $228 million fund to cover these claims.
How do you protect yourself today and in the future against these potential charges? The first thing I encourage every business owner to do is to discuss employee classification issues with an experienced business attorney who can guide you in determining which classifications are correct for your situation. This will usually surface any issues you might be having and allow you to put both a corrective and forward thinking plan in place.
And if you ever need help with his or just have a question, JUST ASK and we will be happy to give you some guidance, complementary of course, to help guide your thinking in this area. And if you have any doubt with regard to any employee, check it out today…don’t wait. Waiting usually only exacerbates the issue.
