Independent Contractor vs. Employee and Misclassification Issues
By: Lauren Marsicano
Insta: @networkingmaverick
Independent Contractor vs. Employee and Misclassification Issues
Once you form an LLC, often you will choose to hire independent contractors rather than full-time employees for cost-saving, tax, and regulatory reasons. However, there is sizeable risk that you might be misclassifying that independent contractor if he/she is acting and being treated more like an employee. This risk is especially apparent for those people you hire who perform contracting work, are paid commission-only, or get paid through their own company (like an LLC).
For instance, if they complete part-time editing work for your local company or if they are a driver for a car service, what is their proper classification? Can you or the person you are hiring actually choose to classify them as one or the other? In short, the answer is no: individuals (or their employers) cannot “choose” whether they are an independent contractor or employee. Instead, many factors that are established under the law (state and federal) determine the proper classification, which includes the nature of the work being done. In Florida, the intentional misclassification of a worker is a felony (yikes!). As you can see, it is important to understand the distinction between an independent contractor and an employee as this status impacts the responsibilities you as the employer, and the rights of your worker.
Independent Contractor vs. Employee Breakdown
Aside from the classification itself, what are the differences in employer responsibility between having an independent contractor versus an employee? The Internal Revenue Service (IRS) explains that business owners are required to withhold income taxes for employees (to whom you give a W2 for tax purposes) but not for independent contractors (to whom you give a 1099 for tax purposes). Further, an employee may also be entitled to certain benefits (like social security and workers’ compensation) paid by the employer, and if an employee gets hurt on the job, he or she generally can file a claim for workers’ compensation benefits. Similarly, employees can typically recover unemployment benefits if they are terminated from a position through no fault of their own, while an independent contractor cannot. Employees may also be covered under wage and hour laws (including overtime requirements) in addition to anti-discrimination claims, which may not apply to independent contractors. It is for these reasons that employers would like to have independent contractors, but merely saying a worker is an independent contractor is not enough. Let’s take a closer look at the state and federal factors that would be considered.
Factors for Determining Worker Classification
When it comes to making this classification, there are certain federal and state factors that must be considered.
The IRS has explained that it, on the federal side, considers a worker’s classification based on two questions: 1) What is the employer’s degree of control over the worker, and 2) How much independence does the worker have? These questions generally can be answered by looking at three different categories discussed below. Note that, in general, only ONE of the below questions has to fit the bill for the employee to be considered a W2 employee.
Behavioral question: Does the company control or have the right to control what the worker does and how the worker does his or her job? If the answer is “yes,” he/she is likely an employee. If the worker is free to manage their own schedule and work process, they are more likely an independent contractor.
Financial question: Are the business aspects of the worker’s job controlled by the employer (these include things like how a worker is paid, whether expenses are reimbursed, and who provides tools/supplies)? If the company controls how the worker is paid and pays for expenses and supplies, he/she is likely an employee. If the worker has to send an invoice to get paid and/or cover their own expenses, they are more likely an independent contractor.
Type of relationship question: Are there written employment contracts (versus projects or an independent contractor agreement) or employee-type benefits (e.g. health insurance, vacation pay)? Will the working relationship continue for the foreseeable future if the work is done correctly and is the work performed a key aspect of the business? If the company provides employee benefits and believes the employee is there for the long-term, she is likely an employee, not an independent contractor.
In general, the more control the employer has over the worker and the more reliance the worker has on the employer (and the less the worker is independent), the more likely that the worker is an employee. When a worker is more independent and in less control by the employer, the more likely the worker is an independent contractor. The independent contractor has become highly litigated as of late, so it is important that you know if you have misclassified your worker. If you have a contractor who is full time and works 30 hours or more per week consistently for 90 days, in the government’s eyes, they are very likely an employee and can claim unemployment on you.
For workers in Florida, the Florida Department of Revenue explains the ten (yes 10!) factors in considers to determine the status of a worker. One factor is not determinative of status, but rather, you should look to the evaluation of factors as a whole:
Extent to which the employer or business can exercise control over the worker’s work (such as how the work is done and when it is done);
Extent to which the worker is engaged in a distinct occupation (the more distinctive, the more likely the worker is an independent contractor);
Extent to which the work being done is conducted with or without supervision from the employer (less supervision points toward the likelihood of an independent contractor classification);
Level of skill required in the work or occupation (the more skill required, the greater the likelihood of an independent contractor classification);
Extent to which the employer supplies the equipment, materials, tools, vehicle, and/or physical space necessary to do the work (when the employer provides many of these things, the worker may look more like an employee);
Length of time the worker is employed (longer term, continuous, and exclusive employment looks more like an employee classification than an independent contractor classification);
Method of payment (when a worker is paid for the job done, rather than the time it takes to do the work, then the worker is more likely an independent contractor);
Extent to which the work is part of the employer’s regular business (if a worker provides services essential or integral to the business, she or he is more likely to be an employee);
Whether employer and worker believe they have an employer-employee relationship; and
Whether employer is or is not in business (if the employer is an individual, and not a business, it is more likely that the worker is an independent contractor).
Key Takeaway
Employers and employees alike tend to have very strong opinions on whether an employee or independent contractor relationship is best for them and their team. Being aware of the factors at both the state and federal levels that we listed above is the best way to avoid potential issues later. However, because these classifications can be complicated and should be determined on a case-by-case basis, it is always recommended that you consult with a lawyer to better understand your specific situation. If you have questions, don’t hesitate to reach out; be proactive so you’re not just waiting for liability to come to you. This is your business, protect it!
*This article is being offered for educational purposes only and is not legal advice. No attorney-client relationship has been formed, and you should always consult an attorney to discuss your unique situation.