Why You Should Never Misclassify an Employee as an Independent Contractor and How to Tell the Difference
Independent Contractor Misclassification
If a worker is misclassified, your business could be liable for a tremendously large bill for back employment taxes along with the penalties, interest, and legal costs. Your company must take a close look at what your expectations of the employees are and if they should be classified as an employee or independent contractor.
If your company is exercising control over your workers, they should be considered an employee rather than an independent contractor. The same can be true if:
- Dictating when and where to do work
- A sequence in which to perform the work
- Provide training regarding procedures and methods
- Financial control of a worker by directing the financial and business aspects of a worker’s job
Misclassification of Employees as Independent Contractors
Interestingly, the labor commission, as well as the EDD, have varying opinions about who is considered an employee and who is considered an independent contractor. There are complexities to these matters which require knowledge and experience. There are many points that are used to define the scope of a business’ relationship with a person and these are used when considering whether someone is an employee or not.
When debating whether you should consider a worker an independent contractor or employee, there are a few things you can consider:
- Don’t closely supervise the independent contractor.
- An independent contractor should not work at your office.
- An independent contractor should not be given an employee handbook.
- Working hours should not be established.
- Ongoing instructions and training should not be provided.
- Equipment or materials should not be provided.
- Travel or business expenses should not be paid.
- Documentation should be signed stating that they are not entitled to, and will not seek, unemployment benefits, and don’t provide any other form of benefits to them.
- No business cards with your company’s logo should be provided to or used by the independent contractor.
- Require the submission of invoices for their time and expenses. They should be paid like a vendor. Secure a contract with the independent contractor to accurate outline the terms of the working relationship. Remember, that just by having a contract, does not necessarily make them independent. You must first comply with the terms of the contract and second be certain that the contract does not describe a working relationship reflects and employer / employee relationship.
These 10 steps should clearly distinguish an employee from an independent contractor. Misclassifying an employee as an independent contractor deprives an individual of their rights to compensation of benefits such as unemployment, disability, workers’ compensation, and various other rights protected under law.
This is frowned upon by government entities who are assigned the responsibility to enforce such laws, therefore when an employer is discovered to have violated these requirements, the penalties are hefty.
There are additional criteria used to differentiate between an employee an independent contractor, but the above is a good start to consider.
At Reverent Employer Consultants, we educate and encourage business owners to comply with the requirements in order to avoid any dangerous pitfalls.