Independent Contractors vs. Employees
What’s the difference between hiring independent contractors and employees? The biggest difference is the trouble a small business owner can bring upon itself from the IRS and the Department of Labor (“DOL”). When companies deliberately misclassify workers in an attempt to cut costs, everyone loses because it tips the scales against all of the companies who play by the rules and workers end up losing out on overtime pay and benefits.
Recently, the DOL went after a Utah company called Solid Construction Group LLC of Midvale for misclassifying 133 workers as independent contractors. Thus, 133 people should have been paid overtime because they are really employees. Now this Utah business will have to pay these individuals overtime compensation, plus liquidated damages in an equal amount to the overall overtime pay owed. Misclassifying employees as independent contractors is one of the most common mistakes small businesses make.
Whether a worker is an employee under the Fair Labor Standards Act (“FLSA”) is a question determined by the economic realities of the working relationship between the business owner and the worker, not by job title or any agreement that the parties may make. The DOL supports the use of legitimate independent contractors, who play an important role in our economy.
Unfortunately, there is no one test used to determine whether a worker is an employee or an independent contractor. The IRS evaluates who controls how work is performed to determine the worker’s status. The IRS uses 20 different factors but says that a worker does not have to meet all 20 criteria to qualify as an employee or independent contractor. The FLSA also considers the following factors to determine whether the employment relationship meets the status of an employee or an independent contractor:
- If the work performed is integral to your business then it is more likely that the worker is economically dependent on the employer.
- Does the worker exercise managerial skills that can affect his/her opportunity for profit and loss like advertising, taking on other clients, and hiring employees.
- How much investment in facilities and equipment has the worker made in comparison to the employer? Investing only in tools and equipment is not necessarily a business investment that indicates the worker is an independent contractor.
- Do the worker’s skills demonstrate independent business judgment? Specialized skills for carpenters, construction workers, and electricians would be independent contractors if these workers take initiative to operate as independent businesses as opposed to being economically dependent on a company.
- Permanency or indefiniteness in the worker’s relationship with the company suggests that the worker is an employee like a typical “at-will” employee.
- Who sets pay amounts and work hours and who determines how the work is performed, as well as whether the worker is free to work for others and hire helpers.
In conclusion, be careful as a small business owner because most workers are employees under these broad definitions. The factors above should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized. Instead, each factor should be considered by asking whether the worker is really in business for him or herself or is economically dependent on the company?