GETTING HR RIGHT: INDEPENDENT CONTRACTOR? OR EMPLOYEE?
BY: PATRICIA PANNELL, J.D., CO-FOUNDER GOTCHA COVERED HR, LLC
It's an issue that continues to confound and perplex small business owners - am I okay hiring an independent contractor to perform work for my company? The short answer is, probably not.
The misclassification of workers can be the death of a small business, financially speaking that is. The U.S. Department of Labor has a broad and expansive definition of "employee" under the Fair Labor Standards Act (FLSA) and imposes harsh monetary penalties for getting it wrong. Likewise, the Internal Revenue Service doesn't take lightly an employer's failure to pay appropriate payroll taxes.
As non-exempt (hourly) employees, workers are guaranteed minimum wage, overtime compensation, and a host of "insurance" withholdings (for example, Louisiana employers are required to provide worker's compensation and unemployment insurance withholdings), including Federal withholding for Social Security. Independent contractors do not enjoy such perks, and generally earn only straight pay for hours worked, with no "safety net" that these government-mandated benefits provide.
As businesses in the U.S. increasingly look to the use of independent contractors in a tight labor market, the Department of Labor is more carefully scrutinizing the labor pool, and actively cautioning (or warning) employers that "most workers are employees."
To assist employers in determining whether their workers are employees or truly independent contractors, the Department of Labor has provided an "economic realities test" consisting of six simple questions:
- Is the work performed an integral part of the employers' business?
- Does the worker have an opportunity to impact profit or loss?
- Does the worker have an investment in the business relationship?
- Does the worker utilize special skills or take independent initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- Does the business exercise significant control over the worker?
The answers to these questions will help clarify the economic independence of the worker. Workers who spend a great deal of their time working for a single employer are likely to be classified as employees. Moreover, if the worker in question is performing work that mirrors that performed by your employees, then it is also likely that the worker is an employee.
The analysis can get a bit complicated, so I like to break it down like this: If you fire a contractor to do a kitchen remodel at your home, he or she provides the labor, the tools, the schedule for beginning and completing the job, all with little oversight by you. He or she also works for other people and does not rely exclusively upon your project for his/her livelihood. He or she controls the way the job is done. Your only interest is that the job is done to your satisfaction, based upon your written agreement with the contractor.
The bottom line is this: Don't risk getting this wrong. If an audit by either the IRS or the Department of Labor results in a finding of misclassification, you are faced with up to three years of back pay, interest, penalties, attorney fees, and costs of litigation. The total monetary liability can be astronomical, and the overall fallout (including bad publicity and loss of goodwill) can be devastating to your business.
www.gotchacoveredhr.com