A lot of companies are tempted to fudge the line between employees and contractors. After all, hiring an employee is a commitment. You invest a lot of time finding, hiring, processing and training the person. You can’t just change your mind without losing out on all that invested time. Plus, you have to cover employees’ taxes and worker’s compensation insurance, and pay for any benefits you offer like insurance and vacation.
With a contractor, it’s simple. You pay a certain amount by the hour or the job and if it doesn’t work out, as long as you’ve satisfied the legal contract you agreed to, you both walk away. The problem is, many employers want contractors to act like employees. Companies may expect the contractor to spend a certain number of hours in the office–that’s not how contractors work. They may want to direct when and how the person gets the job done—employee stuff. And they may not want the contractor to work for other people. But again, that’s what contractors DO.
The Perils of Misclassification
Federal agencies like the IRS and Department of Labor are seriously cracking down on misclassifying employees as contractors. State agencies are starting to do the same. They’ve forced companies to pay withholding taxes, plus interest that would have been paid for the employee, and they’ve levied fines and even criminal charges against companies that ignored the distinctions between employees and contractors. Plus, misclassified employees can sue for unemployment insurance, overtime pay, retirement benefits and more.
In some ways, it’s pretty easy to spot whether a worker is an employee or a contractor. Independent contractors have their own businesses, invoice for their services, keep their own books, set their own hours and work for other clients. Employees work for one employer. Even so, according to the Department of Labor, there are many other factors the courts have taken into consideration, including:
1) The extent to which the services rendered are an integral part of the principal’s business.
2) The permanency of the relationship.
3) The amount of the alleged contractor’s investment in facilities and equipment.
4) The nature and degree of control by the principal.
5) The alleged contractor’s opportunities for profit and loss.
6) The amount of initiative, judgment, or foresight in open-market competition with others required for the success of the claimed independent contractor.
7) The degree of independent business organization and operation.
Courts and agencies don’t look kindly on companies that deliberately create ambiguity: Calling people “interns” when they’re really employees; bringing in several people to “audition” for weeks for the job; inventing a temporary employment status that doesn’t meet strict guidelines for temporary employment. Some companies even try to fire employees then rehire them for the same job as contractors. Really?
Even probationary periods can be tricky. If you hire employees on a three-month probation, sometimes you can’t get rid of them until the three months are up. Even if it’s clear after one month that they can’t do the job.
Assessments Help Clarify Things
We know a lot of companies are scared of the commitment of hiring an employee. It’s a little like getting married after the second date.
If you create a really specific, clear, comprehensive assessment that actually tells you whether this employee can do the tasks, handle the physical requirements, work within your culture and more, you have data to measure whether someone will work as an employee.
Or, if you want to go the contractor route, use a contract that clearly states your relationship—that the contractor is a free agent who works for his or her own business, pays his or her own taxes and uses a standard contract and federally-issued Employer Identification Number. We’ve had clients who reduced the amount of work they farmed out to a contractor and the contractor tried to apply for unemployment benefits. Another client had a contractor who failed to pay his taxes and claimed the client was supposed to pay them.
There are lots of ways to get the work of your company done. Just make sure you pick one and stick to all the rules of that come with it.
We can help you figure out the best work relationship structure for what you need done. We can even help you find the right employee or contractor and train them so you feel confident about the choice you make.
We work with companies on a project basis or on retainer, providing a custom level of HR help designed for your business, with offices in Austin, San Antonio, Dallas and Houston. Contact me at Caroline@valentinehr.com or call (512) 420-8267.