Contract employees not independent contractors

When hiring an employee, a company might choose to create a contract that outlines the expectations, hours, wages, benefits and other terms of employment related to the position. A contract employee might work for a defined period of time, from a few weeks to a few years.
The same company might also hire an independent contractor to work for a few days, or even a few months; and in this situation as well, a contract might outline the expectations for the individual’s services.
Since both individuals may work under a contract, many employers are under the impression that a contract employee and an independent contractor are one and the same. They’re not, however, and the difference between the two classifications is significant, with potential legal repercussions for wrongful classification. This article seeks to provide employers with a greater understanding of the criteria and the risks.
What’s the difference?
At the most basic level, the Fair Labor Standards Act recognizes only two types of workers: employees and nonemployees. A contract worker is your employee, while an independent contractor is not your employee. For example, you would report contract- employee wages on a Form W-2, but you would report payments to an independent contractor on a Form 1099.
Contract employees are usually under your organization’s control. For example, the worker is probably given some direction or supervision on how to perform the work. In addition, you determine the level of pay, benefits and other terms of employment.
An independent contractor usually operates his or her own business, advertises for work, and retains control over how the work is performed. You would normally pay a flat amount specified by the contractor, and you describe only the outcome of the work without controlling the means or processes used to achieve that outcome. Typically, the contractor will quote a rate and perform the job using methods he or she chooses, according to the contractor’s schedule.
What’s the problem?
You could hire someone under specified conditions, as spelled out in a contract, but the worker is not necessarily an independent contractor. If the criteria for an independent- contractor relationship have not been met, the individual is an employee. Different agencies may apply different criteria, but the most commonly used criteria are those established by the U.S. Department of Labor and the Internal Revenue Service. The DOL has stated that misclassified employees are often denied access to family and medical leave, overtime, minimum wage and unemployment insurance; employees are entitled to these benefits. In addition, the IRS is concerned that misclassifying an employee as a contractor (nonemployee) can result in failure to pay income taxes, as well as Social Security and Medicare taxes. State agencies may have additional criteria that will determine whether the worker is entitled to things like unemployment insurance or workers’ compensation.
An independent contractor is not covered by workers’ compensation, and would provide his or her own insurance. However, some wrongful classification claims have arisen after an incorrectly classified contractor was hurt on the job, filed an injury claim, and the workers’ compensation agency determined that the individual should have been classified as an employee.
Wrongly classifying an employee as an independent contractor could result in lawsuits for back overtime, state unemployment insurance or workers’ compensation taxes, and back taxes through state and federal agencies. The DOL has an agreement with the IRS to share information regarding misclassification, and has been creating similar agreements with state agencies. If a misclassified employee files a claim for back overtime, the DOL will notify the IRS to investigate for possible back taxes.
If an individual does not maintain his or her own businesses, does not have bank accounts or insurance in the name of a business, and does not perform the same or similar services for other organizations, then simply writing a contract is not sufficient to establish the independent-contractor status.
You might hire an employee under a contract in order to attract someone with a special skill set, outline the duration of the relationship, or impose a confidentiality or noncompete agreement. These circumstances do not, however, make a worker an independent contractor. •


Ed Zalewski is an editor at J. J. Keller & Associates Inc., a nationally recognized compliance resource company.

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