Treating Employees Like Contractors Can Cost You A Lot

Treating Employees Like Contractors Can Cost You A Lot

“Gig economy” is filled with the promise that the workers want more flexibility, therefore it is also financially and legally fraught between employee and employer.

There are growing number of lawsuits that should not be classified workers considered as free agents. For example, a commission in California ruled that Uber drivers are really employees. Then there’s Hillary Clinton promising that bosses who exploit employees by considering them as contractors will be cracked down.

The US Department of Labor has already offered guidance on how the tests must be interpreted so that the worker can be determined and classified as either an independent contractor or an employee.

The agency also considers the workers to be employees because they follow the Fair Labor Standards Act. It is also likely that they apply a definition that is broad when they investigate the practices of the company.

Differences Between Full Time Employers and Independent Contractors

The employers will be cautious because there is already war declared on the relationship with the independent contractors. Littler Mendelson is a firm that represents employers and they are very much concerned with the department wage of the labor.

To put simply, independent contractors maybe cheaper and more affordable for companies to hire. The employers also do not have to offer benefits such as 401(k)s and health insurance. They don’t even have to get paid days off or overtime. They also do not have to pay the state unemployment insurance or also the worker’s compensation funds when it comes to the behalf of the contractors. They don’t also have to cover the share of their employer when it comes to the payroll taxes. They also do not withhold the income taxes for the employees.

In return, the freelancers or the contractors can also have the autonomy when it comes to deciding where, when and how they can do the work that is assigned. They can also take on the projects for free with the other companies. They need to run their own businesses and also have their own employees, equipment and office space.

Consequences for Employers When They Hire Independent Contractors

This is the case that is supposed to be and the lines also blur whenever the company goes out to hire someone that they regard as the individual that would do integral work and connected to the business. This is what a full time employee usually does. This also dictates when, where and how the work should be done. This also restricts the ability of the worker for the other clients.

If the company has misclassified the workers as independent contractors, then they would have to pay the back wages, back taxes, legal fees, damages and penalties. These are the deadly consequences for the employers when they hire contractors instead of full time employees.

The Department of Labor along with 22 states and the IRS have also cracked the misclassification that results to the employers paying $79 million in terms of back wages for 100,000 workers or even more in different industries.

The mission of the Labor Department is to be vigilant when it comes to protect the workers and their rights and to protect themselves from being violated. This is done in industries such as meat processing, personnel services, landscaping and construction.

However, there are those who choose to be an independent contractor and not a full time employee.

The Labor Department also explicitly stated that “economic realities” determine the working relationship if the worker is an independent contractor or an employee. They would also override the agreement between the employer and the worker. This, however, may pose a problem.

The downside is that this may be a problem for some people. There was a survey that was conducted by the Freelance Union that reached an estimate of 21 million independent contractors in the US alone. Then there are 2.8 million that regard themselves as freelance business owners. A number of them does not want to go back to the conventional 9 to 5 job. The courts usually have a big say when it comes to violating the labor standards and who are independent worker and who are full time employers. It is also clear whether they will regard the definition of an employee in the broad term of the Labor Department.

This is quite a common mistake for business owners whenever they would hire new workers. They weigh the pros and cons for hiring someone as an independent contractor or an employee. There are consequential differences. Employees must be compensated for wages, and tax withholdings. They will also abide by the strict wage orders in their state whenever they incur breaks and overtime. For independent contractors, the employees are not really liable for the tax liabilities or their accidents. Employers often make the mistake of classifying workers. 70% of employers have already made this costly mistake. This can be prevented if they have an idea of what their responsibilities are for independent contractors and full time employees.

Employers must have control

There are businesses that conduct tests in order to determine if the worker will be considered as independent or full time. The test is chosen depending on the work of the individual. The more control the employer has, the more productive the worker will be. Also, the more chances and possibilities that they will be classified as full time employees.

The IRS has their own view when they determine the status of workers. They use a 20-factor test. Few of these areas look at the work that is expected of the individual, the training and instructions given to the employee and the right to terminate the work relationship along with the compensation. These factors are out of control of the individual.

Therefore, it is very important for the business owners to exercise the control. Once they have retained this right, then they can classify the individual as an employee. Just because there is a draft of the written argument that calls the worker freelance or independent, it is not enough to determine and establish the independent contractor relationship. This is still quite an easy distinction whenever they would have to remember if these individuals are one-time workers or they do the job at a priced that is fixed and set for many companies. If it is the latter, then they are independent contractors.

Tips To Determine if the Worker is A Contractor

There is really no clear definition of an independent contractor in any state for that matter. However, the Fair Labor Standards Act does indicate that the decisions by the enforcement agencies and the state employment to see the classification of the contractor is discussed in may ways that workers can actually be classified as independent contractor in a justified manner.

Here is an exhaustive list of the factors that determine if the business has an independent contractor relationship:

– needs little control
– distinct occupation
– expert on a niche
– hired quickly and just for a short time
– paid per project
– neither party sees that the relationship shared is that of the employer and the employee
– the instructions are minimal
– the work is not personally rendered
– there is no set hours
– employee works off premises
– expenses are not reimbursed
– there is an opportunity for either a profit or a loss
– the service is available to the general public
– there is no right to be terminated or discharged at any time
– the employee can also be hired by others
– there is a significant investment on the equipment that is used.
– there is minimal reporting
– the employee is not required to work full time
– the relationship is expected to not continue
– the training is minimal
– the hiring party is not a business, neither does it benefit the business

– the duty is not part of the employer’s regular business
– the employee provides his own tools or equipment
– the occupation is a specialist without any supervision

It is important to note that if the employer’s instructions to the worker do not include how, where, when to work then the working relationship is considered to be an independent contractor. This is very important in relation to the local, state and federal taxes. The IRS also puts some degree of independence and control of the employees that the businessmen hire in three categories: behavioral control, financial control and the kind of relationship that both parties enter.

Why All This Information Matter

For obvious reasons, employers are held financially responsible if employees make mistakes. Often times, when a worker is negligent with his or her actions and these result to dangerous situations, the company may get served. In fact, there are sections on the civil code that clearly states if one of the employee is negligent during the transaction of any agency or business, the wrongful acts that were committed by the worker, as long as this is within the scope of the employment, pretty much opens the business and makes it quite prone to financial liability. It really does not matter if the employer had nothing to do with what the employee did. Because the former is the owner, then he can still be held liable by the party that had been injured.

Should Employers Pay for the Mistakes of An Independent Contractor?

If there is an independent contractor working for the company, the businessman will still be liable for their omissions and mistakes

However, there are still some exceptions to the rule and this includes the work that is done in hazardous settings. Another exception is when the independent contractor is instructed by city ordinance or a statute and expected to provide the precautions and safeguards and also maintain the equipment in top notch condition.

If the businessman fails to show that he is responsible for the contractor and the latter physically injures someone else, then this makes it more prone for the former to be sued. it is also important to note that the instructions that resulted to this negligent act is the very reason why business owners can be sued.

Exempt vs. Non-Exempt

Way to Classify As Exempt

One of the key areas that employers must know in determining if the worker is a full time employee or an independent contractor is that 51% of their work is exempted. The monthly salary is also equivalent to twice the minimum wage for the full time employee in order for them to be considered as exempted.

What is 51% of Work?

When the employee is determining if the worker is exempted, the number to remember is 51. If the position that is in question has the employee spending more than half of his or her shift doing exempt work then they are classified under that category. On another note, if the worker also makes the rules as opposed to following the rules, then he or she is regarded as exempted employee and cannot receive compensation for overtime.

Fixing Wrong Classification on Federal Taxes

If there is a wrong classification for the kind of employment, federal taxes can result to stiff penalties. It is one of the areas that must be addressed first when working with new business clients. This is to help them be able to reclassify themselves as personnel. Quite often, there are workers that are not listed as employees but are mentioned in the books. There are also other cases wherein the damage has already been done to the company but it can still be fixed nonetheless.

As stated in the VCSP or the Voluntary Classification Settlement Program, eligible employers can also obtain the relief from the federal payroll taxes that have been owed in the past. This plan is then made available to the businesses, government entities and tax-exempt organizations that have filed these in past so that they can be considered as just one class.

It is everyone’s business to make sure that the company is running well. Any question related to the kind of employment that an employee has must be answered by the employer.

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