If you hire someone to perform services for your business, that person may be classified as an independent contractor or as an employee. The differences between these two classifications are often misunderstood by an employer, and these misunderstandings can have significant legal consequences.
There are several benefits for a small business owner who hires independent contractors instead of employees. First, the business owner does not have to provide health benefits or retirement plans for an independent contractor. The business owner also does not have to pay employment taxes on an independent contractor, as the IC is considered self-employed and pays his or her own taxes on Schedule C of a 1040 IRS form. Recordkeeping is therefore simpler. Also, under the doctrine of respondeat superior, an employer can be held liable for the tortious acts of his or her employees performed within the scope of employment. In the case of an independent contractor, however, the employer is not liable.
Often times, however, a small business owner believes they have hired an independent contractor, when the court may consider the person to actually be an employee. Just because a business owner labels a worker one way or the other, does not necessarily mean that classification is accurate. Courts are not bound by an employer’s classifications, and may reclassify workers if deemed appropriate. In the case of reclassification, an owner may find him or herself liable for taxes or tortious actions on behalf of the employee. So, it is important for small business owners to carefully ask themselves whether their believed independent contractors are actually employees.
To make this determination, a small business owner must understand the test that courts generally use. The test has several factors, however most of the factors involve one thing: control. Courts ask, in short, who controls the worker? Independent contractors control themselves. They set their own hours, their own fees for payment, and typically provide their own materials and tools. A contractor may have several jobs for different businesses at once. On the other hand, employees are controlled by the business owner. The business owner usually sets hours, wages, and provides the materials and tools for the job. Furthermore, an employee is usually under the control of only one employer at a time.
Therefore, even if a small business owner does not pay taxes on a worker, and considers them an independent contractor, if the business largely controls the worker, the court or IRS may reclassify the worker as an employee. The small business owner may find him or herself facing liability for actions of the employee or for unforeseen back taxes. A small business owner should take steps to avoid reclassification – first, start with an employment contract that clearly defines the worker as an independent contractor. Next, the business owner must follow the control rules regarding the worker, and allow an independent contractor to control himself in order to retain contractor status.
If you have question regarding classification of a worker as an independent contractor or employee, or are facing a possible court case, do not hesitate to call an experienced small business attorney at Kalia Law, P.C.to discuss your case today.