Employee. Independent contractor. Three little words that can cause big headaches for your small business if your employees are incorrectly classified.
Without an MBA or a staff of HR pros, how can you know whether the person you’re paying is correctly classified? Well, it’s complicated, which is one reason why so many employers get it wrong. Here are some common ways misclassification happens:
- Misclassified as Exempt. Employers must be sure that non-exempt employees are paid for all hours worked and receive overtime pay whenever they work more than 40 hours in a workweek.
- Misclassified as an Independent Contractor. 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.
Unfortunately, there is no one test used to determine whether a worker is an employee or an independent contractor. Consider the relationship between your business and the worker by asking yourself the following:
- Is the work performed integral to your business? If the answer is yes, it is more likely that the worker is economically dependent on the employer, and therefore should be an employee.
- Do you pay the worker individually or to the worker’s own business?
- Does the worker invoice you?
- Does the worker have other clients besides you?
- Does the worker hire helpers?
- Does the worker use his or her own equipment and tools?
- Who sets pay amounts and work hours?
- Do the worker’s skills demonstrate independent business judgment?
Note that a worker does not have to meet all the criteria to qualify as an employee or independent contractor.
Be careful as a small business owner because most workers are employees under these broad definitions. 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 the worker economically dependent on the company.
This is where an experienced small business lawyer can bring you clarity by weighing the factors of your specific situation. Call on us for help with employment classification issues or any other small business concern that could use an objective, legally sound perspective. We believe in Utah small business and we’d love to be part of your team.