With the rise of the gig economy and a larger offering of nontraditional jobs, it can be difficult to determine, from a legal standpoint, whether the person is an independent contractor or an employee. Advancing technology has made it easier for people to work from remote locations from anywhere in the world, and this only adds to the confusion.
Typically, classifying a person as an independent contractor is more cost-effective for the business, as many of the costs associated with a regular employee, like unemployment insurance and workers’ compensation, are effectively eliminated, making for a tempting proposition.
But misclassifying workers can have serious consequences, both legal and financial. To help you navigate these tricky waters, here’s what you need to know.
First, there is no universal standard regarding what separates an employee from an independent contractor. While there are federal guidelines that serve as a starting point, states can also have their own rules1. Additionally, different departments within the federal or state governments may have differing tests to determine how a worker should be classified.
However, most of these policies revolve around a common core, and that involves the amount of control a company exerts over the worker. For example, if a service provider is given explicit instructions regarding when, where, and how they work, they are more likely to be considered an employee from a legal standpoint. The presence of formal training on how to complete the work can also indicate a person is an employee and not an independent contractor, as well as a sense of permanency or indefiniteness in regards to their relationship with the company. If the worker is restricted from seeking out other business opportunities, they may also be considered an employee.
Other factors, such as whether the person is operating a business for themselves and whether they have invested in their equipment, can also separate independent contractors from employees. But the topic is complex, and determinations can vary depending on your state, so it is critical to review the precise laws and regulations in place in your and the worker’s area to help define the relationship accurately.
Often times, if the worker has company issued equipment such as a laptop or cell phone or even business cards with company logo, they are likely to be considered a regular, W2 employee.
Consequences of Misclassifying a Workers
Failing to correctly classify a person can have serious legal and financial ramifications. For example, the worker may have the right to bring about a lawsuit based on the violation of specific federal or state employment laws. This can include, but is not limited to, unpaid overtime owed, wage statement violations, and missed break penalties. In some cases, awards associated with the lawsuits can involve a level of punitive damages, bringing the total cost far higher than the original amount claimed.
Based on the classification standards, there has been a recent rise in the number of misclassification lawsuits as more workers have determined that their independent contractor status was inaccurate and they should have been considered employees, and entitled to all of the associated benefits, but were not hired as such.
Federal and state agencies also have the power to audit a company’s worker classifications and can issue penalties based on any violations including, but not limited to, back payment of employee taxes, unpaid workers’ compensation, and unpaid unemployment and disability insurance.
In the end, it is critical that every business review the federal and local regulations governing worker status and ensure that everyone is classified properly. One method for lowering the risk associated with hiring independent contractors is to choose to work with a reputable staffing firm instead. They can provide you with temporary workers for a range of needs, including short-term projects and long-term assignments, who remain employees of the staffing firm, ensuring you have no liability regarding the worker’s classification, insurance or retention of personnel records.
Work With a Top Staffing Agency in Atlanta
If you are interested in supplementing your workforce, the professionals at Employ Partners can help. Contact us today to work on finding the right worker and classification for your team.