You hired someone to work in your department on a temporary basis. You don’t want to hire them on as a permanent employee because perhaps the work is project-based or they’re temporarily filling in for an employee on medical leave.
You decide to make things simple and call them an Independent Contractor. You pay them an hourly wage and give them a form 1099-MISC at tax time. Time to press the “that was easy” button.
But hold on – is the worker really an Independent Contractor? The Internal Revenue Service, Department of Labor and Fair Labor Standards Act each have specific standards on when a worker should be classified as a true Independent Contractor. Based on these standards, many employers make the mistake of classifying their temp workers as Independent Contractors. And the government is cracking down on these misclassifications.
- The IRS uses a three-factor common law rule to determine whether a worker is an employee or Independent Contractor. One of the key factors is whether the company has the right to control the work and how the work gets done.
- The DOL considers a “Suffer or Permit” standard to identify workers who are misclassified as independent contractors. Meaning the worker, as a matter of economic reality, is dependent on the employer.
- The FLSA says that the relationship between a worker and employer can’t be determined based on a single characteristic. Some considerations include the extent to which the services are integral to the business, the length of time the contractor’s been doing work at the company and whether the worker uses the employer’s equipment or their own.
Navigating these different standards can be challenging. So what should you do if you have an Independent Contractor working for you?
- An easy way to avoid any misclassifications (and therefore possible litigation and penalties) is to employ the Independent Contractor through a company that can act as their Employer of Record. These are sometimes referred to as Payroll Providers, although most traditional staffing companies will also provide this service. They’ll charge a nominal administrative fee and ensure the proper taxes are taken out of the worker’s wages.
- Hire the contractor in a Corp-to-Corp arrangement, where the worker has established themselves as a business entity with a valid Tax-ID number. This protects the employer but can be an administrative burden for the worker.
- Hire an outside company to assist with Independent Contractor verification. They’ll ensure that anyone working for your company as an Independent Contractor meets the standards set by the FLSA, DOL and IRS.
Bottom line, many employers misclassify Independent Contractors which can result in increased tax risk and litigation. Make sure any independent contractors working for you meet the government definitions of such.
This article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular employment situation.