How to Avoid One of the Top Mistakes that Employers Make: Misclassifying Employees as Independent Contractors..
There are certain mistakes commonly made by employers, regardless of industry or region. This is particularly true for a small to mid-sized employer that does not have a separate Human Resources Department. Today’s installment tackles the issue of misclassifying employees as independent contractors.
While some workers may be correctly classified as independent contractors, companies should carefully analyze each such position to make sure that the classification complies with the requirements of the various government agencies, such as the Department of Labor Standards Enforcement (DLSE), Employment Development Department (EDD), Department of Labor (DOL), Franchise Tax Board (FTB), and the Internal Revenue Service (IRS). Otherwise, employers may be forced to pay additional compensation to the misclassified employee, attorneys’ fees to the company’s attorney as well as the employee’s attorney, and penalties to the agencies. These all add up quickly and can seriously damage a company and its bottom line.
Government agencies disfavor independent contractor arrangements and prefer for employers to hire employees. Each agency uses different factors to determine whether a worker has been misclassified as an independent contractor. Adding to the confusion for the employer, sometimes one agency will reach a different conclusion than another agency when evaluating the same exact case. While the factors vary from agency to agency, they all boil down to the concept of control. Who has control over the worker? If the worker sets his own schedule, determines the pay rate, uses his own tools/equipment, and determines the means, method and details of how he will accomplish the project, then he is more likely to be an independent contractor. If the Company dictates when, where, and how the worker will tackle the project then the worker is more likely to be an employee instead of an independent contractor.
Companies should have written agreements with all of their contractors, which set out the scope of the contractor’s duties. The contractor must maintain her own business separate and apart from the company retaining the service. This means the contractor should, among other things, pay her own business expenses, use her own equipment, have a business license, and send the company invoices for her work. Otherwise, the well-meaning employer may have inadvertently hired an employee instead of retaining an independent contractor.