Independent contractors can do valuable work for a company without the complications of hiring them as employees. Employers need to make sure, however, that independent contractors don’t turn out to be their employees after all.
Some of the factors courts will consider when deciding whether someone is an independent contractor or employee are who controls the manner in which the job is done, who sets the worker’s hours, whether the work is performed on the employer’s property during regular business hours, how long the company’s relationship with the worker lasts, the method of payment, who provides the tools necessary to perform the job, and whether the work is part of a company’s regular business.
Learn how to correctly classifying workers in the Wage and Hour Compliance Manual
Incorrectly classifying workers as independent contractors can be a costly mistake. If a court decides they’re really regular employees, a company can incur significant liabilities. Misclassified workers are entitled to the benefits they would have received if they had been classified correctly. This could include health insurance, retirement benefits, and stock options.
HR Guide to Employment Law: A practical compliance reference manual covering 14 topics, including overtime
Discrimination and harassment
Employees, unlike independent contractors, are protected by discrimination and harassment laws, including an employer’s duty to accommodate any disabilities. But, if a company’s employees harass or discriminate against an independent contractor because of his race, the company can be liable under Section 1981 of the Civil Rights Act of 1866 (yes, 1866). The law protects minorities’ right to enter contracts, including an independent contractor’s agreement to perform work for a company.
Overtime and minimum wage
Employers might also have to reimburse misclassified workers for wages they should have paid them under the Fair Labor Standards Act (FLSA). That includes overtime and minimum wage.
Tax ramifications for misclassifying workers
If an independent contractor turns out to be an employee, the company might have to pay back taxes and/or penalties for federal and state income taxes, FICA, and unemployment.
Audit your wage and hour and employee classification policies and practices with the Employment Practices Self-Audit Workbook
Injured workers who have been misclassified as independent contractors are eligible for workers’ comp benefits the same as other employees. The employer’s state’s workers’ comp law determines who’s an “employee” eligible for workers’ comp benefits.