Independent contractors make up a significant portion of the workforce these days. What is unfortunate, however, is that far too many are misclassified and should be working as employees. Too many companies make the mistake of using contractor status as a means of avoiding benefits or paying less in the way of business taxes. It is vital to protect your business, to know the difference between employee vs. independent contractor classification. Here is an overview of the two and why it matters to your HR services.
Employee vs. Independent Contractor
The basics of employees vs. independent contractors come into play in terms of how the worker’s job duties are defined, overseen and performed. If the worker is completely responsible for their own work and the means by which it is completed, they are an independent contractor. If, on the other hand, the employer dictates how the work is to be performed, the nature of the work, or provides oversight and supervision regarding the work, then the worker is an employee.
Avoid Exercising Control
Understanding the difference between contractors and employees really comes down to the control exercised in the course of the duty. If you hire a worker as an independent contractor, make sure that you do not supervise or direct them in the performance of their duties. Never establish their working hours. Do not provide an amount of work or deadlines so tight that they require full-time labor to complete.
Contractors should not be held to employee handbook standards or company policies, except in terms of how their activities might directly reflect positively or negatively on your company. They should not attend company meetings, be required to submit formal written reports or be treated or referred to in any way as an employee of your company.
Contracted workers should not be given the perks an employee might enjoy. This means they should not have a workspace in your office, they should not be given business cards, office supplies, equipment or materials. They should not have a title, be given business expenses for travel, employment benefits, or paid on a regular pay schedule.
Paying Contract Workers
Contracted workers should always submit invoices for specific projects and paid as an outside vendor. In fact, any time a project is completed, a new contract should be generated for any follow-up or future work. All agreements should be in writing and followed specifically and to the letter.
Penalties for Misclassification
Getting caught misclassifying employees carries a number of penalties. At the very least, you will be liable for all back social security taxes your company failed to pay. You will also be penalized for each W-2 you failed to file. Additional penalties can include a percentage of misclassified wages and failure to pay tax penalties. These penalties can be in the tens of thousands of dollars, depending on the individual violation.
Don’t get caught in the mire of misclassifying an employee vs. independent contractor. To make sure that your company remains above board, turn to an experienced and expert HR outsourcing firm like QuadWest. Read a bit about what we do and contact us to learn how we can make sure you don’t make costly misclassification errors.