You can’t do it all on your own. You’ll probably hire outside people to do a lot of work for you. This works out great, you don’t have to pay employment taxes, workers’ compensation, unemployment compensation, benefits, and office space and equipment for these people. You don’t have to worry about wage and hour law, family and medical leave, and many other laws that apply to your employees. You’re not liable for their negligence (unless they’re acting as your agent), and they can’t make worker’s comp claims against you (though they can make claims for your negligence).
But your business starts to grow. Maybe you need someone on the weekend to stock shelves. Maybe you need someone to help you write a proposal. You buy equipment for them to do their job. You give them space in your office. You start needing them more and more. This is where it gets dangerous. If you start to control what is to be done and how it’s done, then your independent contractor might now be your employee. Once they are your employee, you’re required to pay things such as payroll taxes and worker’s comp and you’re now subject to many employment laws. It’s a whole new world.
There’s no clear line when this happens, each law or agency has it’s own factors to determine where that line is. The DOL has its own, the IRS has its own, and there’s also case law for tort liability. But all of them have similar factors.
If you ask yourself the following questions, you’ll more than likely be safe with all these laws and agencies:
- Do you provide instruction to the person?
- Do you provide training to the person?
- Does this person use your trademarks?
- Do you invest in equipment and other items to support the individual?
- Do you reimburse the person for business expenses?
- Is the person prohibited from pursuing other business or employment opportunities?
- Is the person prevented from earning a profit or loss from the work?
- Does the person work without a written contract?
- Does the person perform key aspects of your business?
The more yes answers means the person is more than likely your employee and not an independent contractor.
What happens if you get it wrong? You must pay for the person’s social security tax, federal income tax, and unemployment insurance for three years plus interest and penalties. You might be liable for overtime wages and penalties. There might be ramifications for workers’ compensation and other laws that apply to employees. You might be liable for their negligence.
The best way to avoid a misclassification is to sign contracts with your independent contractors. You get much more protection if the contract is with a corporation or a limited liability company.