As I speak with other small business owners whose businesses are growing, they often share that they need help to keep all of the balls in the air. They just can’t do it all. Oftentimes, they say, I’m looking for somebody to come do “xyz for just a few hours a week” or on an as-needed basis. As they keep talking, it becomes clear that they intend to hire an independent contractor because they want some relief and to keep managing expenses.
Aside from the fact that those conversations usually lead me down a path to asking very specific questions to get them to think through how they specifically intend to use “help” (Sometimes business owners hire people without putting together a clear job description or writing out the purpose for establishing the relationship. They’re just focused on how overwhelmed they are), I eventually get to the point in the conversation where I bring up the fact that there are substantial regulatory differences between independent contractors and employees. More specifically, I bring up the risk and cost of misclassifying employees as independent contractors with a statement that goes something like this:
Because the employer benefits from not paying payroll taxes for independent contractors, it could be construed that you have a vested interested in intentionally misclassifying employees. Further, when you avoid having employees, you also avoid obligations for workers compensation insurance, which is another misclassification incentive (Woe be unto you if an misclassified independent contractor is injured and finds out that s/he is really an employee). Finally, you might also wind up owing incalculable backpay, including overtime, because you probably didn’t track or care about the amount of hours the person worked because you focused on the financial deal you struck.
Unfortunately, it’s not only growing small businesses that make this mistake! Many well-established organizations should be concerned. Sometimes an employee isn’t intentionally misclassified. Rather, someone made an error years ago, and a thorough audit hasn’t taken place since (NOW, is a good time to audit positions given the recent changes to overtime rules). Generally, I explain the issue this way: the more control you have over how the person achieves the goal, the more likely it is that you have an employee. Too much “control” becomes a question as soon as you attempt to dictate anything regarding the project beyond a completion date. More specifically, if you’re telling the person you hired when and how to do the job rather simply negotiating expected outcomes, deadlines and evaluating the final product, you should probably re-evaluate how and why the person is classified as an independent contractor.
Below are nine questions you should answer to help you think about whether you have a misclassified employee.
1. Do you provide training for the worker?
2. Do you provide support or working materials for the worker?
3. Is there an expectation that the person will have on-going work rather than focusing on the project or task?
4. Do you control who the independent contractor works with in order to get the project done?
5. Would your business be severely and negatively impacted if the contractor did not perform?
6. Does the worker have specialized skills that he or she had to hone and invest in personally?
7. Does the worker promote himself or herself as an entrepreneur?
8. Does the worker have the ability to control how the work is done so that s/he is able to realize a profit?
9. Does the worker do so much work for you that he/she cannot work for other clients (If so, how long will this go on? The longer, the worse.)?
IRS Information to help you properly classify employees:
Small Business and Self-Employed Guideline
20 Factor Test
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