For the last twenty years and with no resolution in sight, a hot debate in business news has been how to distinguish between an employee and an independent contractor. With the Independent Contractor model, there is much to be gained for business owners but much to be lost for federal and state governments. Even Independent Contractors themselves stand to gain or lose much under this business model. The current period of social entitlement (spurred on by politicians and the media) puts business in the forced position of readying themselves to deal with government inquiries or Plaintiff Class Action Attorney claims. Large business renegades whose defiance of government regulations are widely publicized over the news have created difficulties for all business owners who may face the same scrutiny and challenges.
Despite the challenges associated with compliance regulations, business owners stand to gain much with the Independent Contractor model. Motivated independent contractors lead to increased profits that benefit both business owner and IC. No company is immune to scrutiny and government inquiry, but businesses armed with the proper information, documentation, and business model structure can confidently face these challenges without fear of penalty. There is confidence in being compliant, and business success is sure to follow when you work with appropriately classified independent contractors.
A Simplified Definition of an “Employee”
According to the official IRS website, an employee is anyone who performs a service for you in which you are the one controlling the details of the service.1 If you are the one determining exactly what will be done, when it will be done, and how it will be done, then the individual is your employee and not an independent contractor. This holds true even when you offer your “employee” freedom of action, because you maintain control over the details of their service.
A Simplified Definition of an “Independent Contractor”
Conversely, an independent contractor is anyone who performs a service for you in which you have the right to control only the result of the work. They retain full rights to control what, when, or how the work is performed.2 Independent contractors are paid for their service but maintain independence and make their own decisions about the operation. They are also flexible to work with multiple business clients and are subject to self-employment taxes.
Misclassifying Employees
Misclassifying employees as independent contractors poses a myriad of problems for everyone, including you as the employer, the employee, the economy, and taxpayers. Under the Fair Labor Standards Act, employees are entitled to minimum wage, benefits, overtime pay, paid days off, and worker’s compensation. 3 However, many businesses misclassify employees as independent contractors to avoid responsibility for providing these benefits and for covering payroll taxes and withholding income taxes. This misclassification removes employee rights and leads to lower federal tax and state tax revenues. If it is discovered that you have misclassified your employees as independent contractors, you could be responsible for paying back taxes, back wages, legal fees, and other penalties.
The Benefit of Hiring Independent Contractors
While the risks of employee misclassification may be significant, there are substantial benefits to establishing a compliant business relationship with independent contractors. Many talented individuals whose services could benefit your business will prefer to work as independent contractors because they retain independence and control over their situation. When in compliance with the above definition, your business can profit from the provision of additional services without you having to be responsible for employee benefits, compensation, taxes, and other such obligations. Hiring independent contractors also allows you to build mutually beneficial relationships with innovative thinkers and quality workers who can strengthen your business while maintaining their autonomy.
Becoming Compliant
By becoming compliant with the above definitions, you will be able to avoid penalties and experience the full benefits of symbiotic business relationships with your independent contractors. Consultech offers pro-active services to help you achieve and maintain compliance with the above legal definitions so that you are in the best possible position to avoid the penalties of employee misclassification. With Consultech, companies like yours also receive re-active services to help you respond to and resolve any government inquiries, claims, and disputes that may arise. We will provide you with the best possible representation and the expertise needed to prepare you well in advance and resolve any issues as efficiently as possible, in most cases saving clients both time and money.
1 IRS Definition of a Common-Law Employee: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employee-Common-Law-Employee. Page Last Reviewed or Updated: 30-Jun-2015.
2 IRS Definition of an Independent Contractor: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Defined. Page Last Reviewed or Updated: 05-Aug-2015.
3 The Fair Labor Standards Act of 1938, As Amended: https://www.dol.gov/whd/regs/statutes/FairLaborStandAct.pdf. Revised May 2011.