Hiring someone on an independent contractor basis has many advantages for employers. But treating workers like independent contractors when they should be classified as employees instead can cause costly problems.Independent contractors have many advantages for employers. Employers can hire them on a per-project basis and let them go when the project is completed. They can often hire experienced workers who want to maintain a degree of independence. And they don’t have to pay benefits or workers’ compensation.
Or do they? In the late 1980s and early 1990s, many companies faced steep fines for failing to provide workers’ compensation to workers who were misclassified as independent contractors, particularly in the garment and manufacturing industries. Although today most companies are more aware of the problems of misclassifying workers, problems do still arise. Misclassifying someone as an independent contractor when they should be classified as an employee can lead to back taxes, penalties and fines. It pays to know the difference!
Generally, the degree of control you exercise over the worker determines whether he or she is an employee or independent contractor. For example, an employer usually provides a worker’s materials; an independent contractor often provides his/her own. An employer sets an employee’s work hours; an independent contractor usually has the right to set his/her own schedule.
The following criteria can help you determine whether a worker is an employee or an independent contractor.
- Must obey instructions concerning when or how to perform the job.
- Company provides training.
- The job is “integrated,” or central to the company’s operations—the more integrated, the more likely the worker will be considered an employee.
- Services must be performed by a particular person.
- Has an ongoing relationship with the company.
- Company sets the work hours.
- Company requires full-time work at its business.
- Company controls where the work is performed.
- Company determines the order in which tasks are to be done.
- Company requires oral or written reports.
- Receives payment by hour, week or month.
- Company provides tools and materials.
- Company pays travel/business expenses.
- Company can discharge a worker for reasons other than not meeting a contract’s terms.
- Can usually quit without liability for failure to complete a job.
- Responsible for the outcome of the job and can determine how it is to be done.
- May be licensed by a state board; may have invested considerable sums in training.
- Can hire assistants and is responsible for their pay.
- Advertises or otherwise makes his/her services available to the general public.
- Can set his/her own work hours.
- Can work for more than one company at the same time.
- Usually paid on a per job or commission basis.
- May have made significant investment in tools.
- Can realize a profit or loss from a job.
- Liable for completing a job according to contract.
If you’re still unsure whether a worker qualifies as an independent contractor, you can request a ruling from your state department of labor or employment.