How companies classify persons that perform services for them carries tax, unemployment, workers compensation, liability and other implications. The two primary classifications are employees or independent contractors. Which of the two classifications a person falls under depends on several factors.
Determining the Legal Distinction:
The key element in determining whether a worker is an employee or an independent contractor is the amount of control the worker has over his or her job duties and what that person accomplishes or produces. A worker who performs services for a business is usually an employee if the business or organization can control what will be done and how it will be done. In determining whether a person providing service is an employee or is an independent contractor, any information that provides evidence of the degree of control or the independence of the worker must be considered.
Courts will look at factors that will demonstrate the amount of control exercised by the employer over the individual providing services such as whether the worker or the employer supplies the equipment or tools necessary for the work. Other factors the Courts consider include but are not limited to who determines the worker’s schedule, any instructions or training provided by an employer, whether an individual performs regular or sporadic services to the business entity and if the worker actually has their own separate office or business.
Although an organization and an individual may sign a contract characterizing a worker as either an independent contractor or an employee the Courts will look past the contract and determine for themselves the appropriate legal classification based upon the actual working relationship. The Court may consider the agreement to demonstrate what the parties intended, and who was benefiting by the arrangement. The Internal Revenue Service (IRS) has its own, similar test to determine whether an individual who is performing services for a business is an employee or independent contractor.
Who Qualifies as an Employee?
Normally someone who performs services for a business is an employee if the business or entity can control what will be done and how it should be done. If a worker goes to an office of a business regularly, has control of scheduling, receives training and instruction from the business or organization, and does not have control over the work which they perform, that person is an employee and not an independent contractor.
Who Qualifies as an Independent Contractor?
As a general rule independent contractors have the right to control or direct only the result of the work they perform, and not the means and methods of accomplishing the result. If a person performing services for a business supplies their own tools, works on their own schedule, receives little or no training, and works out of their own office, they will generally be classified as an independent contractor.
An example of an independent contractor would be the painter who is hired by the builder of a home to paint the interior of the house. The painter would supply his own tools and equipment and would have complete control over the painting of the home. In addition, the painter would work on his own schedule as long as he or she completed their job within the general time frame given by the builder of the home to complete the job. The painter would not receive any training on how to complete the job from the builder they would simply be hired to perform painting on the home.
Why the Distinction is Important:
Generally, an employer has to withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee, but not to independent contractors. An employer generally benefits more by classifying workers as independent contractors, because the employer will not have to pay the employment taxes, health and insurance benefits, vacation, retirement plan contributions, and other costs that it would have to if those workers were employees. In addition, unemployment insurance benefits and state workers compensation systems are designed to protect employees, and do not protect independent contractors. Independent contractors must provide their own health insurance, fund their own retirement plan and pay other costs a business would pay for its employees.
Tax Implications:
Employers withhold federal and state income taxes, as well as social security, Medicare, and other deductions, from their employee’s paychecks. Employers turn this amount over to the government, along with their own share of payroll taxes.
In contrast, companies pay independent contractors without taking any deductions. The contractors themselves must calculate their income and self-employment taxes, and pay the government that amount on a quarterly basis. An independent contractor who incurs business expenses may be able to deduct those expenses.
If a business incorrectly classifies an employee as an independent contractor, it may later have to pay employment taxes owed for that worker, plus a hefty penalty. Anyone can get a ruling on employment status from the IRS by completing Form SS-8. The IRS does not recognize the validity of any written agreement between the parties, but considers factors evidencing control over the services performed as the Courts do. Specifically, the IRS applies a 20 part test that considers evidence falling into three categories, behavioral control, financial control, and the type of the relationship itself, to classify a worker as an employee or as an independent contractor.
Who is Liable?
A business that pay an independent contractor to provide services for it and does not control how the services are performed does not have legal liability for any injuries or damages caused by that service provider. An independent contractor is liable for his or her actions while on the job. For example, if a company hires a painter to paint their office and a customer slips on spilt paint the independent contractor would be liable for the customer’s injuries and not the business were the accident happened.
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