When a business hires someone, they have to determine if the worker meets the criteria to be classified as an employee or a contractor. This is more than a payroll detail because it impacts various benefits like taxes, wage obligations, unemployment coverage and similar matters.
The Internal Revenue Service (IRS) maintains guidelines that help companies differentiate between employees and contractors. In a nutshell, both individuals perform work for the business, but an employee is under the control of the employer while a contractor isn’t. Another differentiating factor is that independent contractors usually offer services to the public, but employees work for their employer.
The agreement must match the work
A written agreement can help to define the status of the individual, but that’s not enough by itself. A contract that calls someone an independent contractor may not hold up in court if the business controls the schedule, tools, supervision, method and ongoing work in a way that appears to be employment.
A business contract should clearly outline job duties, pay, responsibilities, confidentiality and any conditions of employment. Clear contracts can reduce the risk of implied terms that stem from interviews, emails, common workplace practices and employee handbooks. This is important because some lawsuits are based on disputes over what the business promised to do and what the worker was required to do.
Businesses should ensure a contractor agreement before the work begins and again if the relationship changes. This can help to prevent a project-based contractor from being subjected to things like the company assigning daily tasks, having to work fixed hours or becoming part of the daily operations of the company.
Misclassification can lead to consequences
Misclassification can lead to a company facing serious financial consequences. The IRS notes that misclassification could lead to the employer being liable for employment taxes, which include income tax, Social Security, Medicare and unemployment taxes. It can also lead to wage claims, overtime disputes, benefit issues, penalties and audits.
Reviewing records and determining if everything is up to par can help to protect the business. It’s also beneficial to have someone on the company’s team to protect the business’s interests.