DISCLAIMER: This post provides a general overview of worker misclassification. It is not legal advice, and I am not your attorney. If you require information or advice applied to your unique situation, please make an appointment to discuss it with an experienced attorney of your choosing.
We work with our clients to create employment as a partnership toward mutually compatible goals. The employer entity cannot achieve any of its goals without at least one employee, who might also be an owner and perform the duties of multiple positions. That employee is in partnership with the entity, which pays for the employee’s services that keep the business healthy. Most people can see this clearly.
As a business grows and adds workers, the people that manage it might forget that all employees must still maintain the business’ health in exchange for their continued employment. Conversely, an independent contractor, or vendor, is only responsible for performing the services agreed upon. It has its own business health to manage.
Commonly-Used Terms for Independent Workers
Some businesses have attempted to circumvent labor, tax, and workers compensation laws by giving workers titles such as permalancer. They claim those workers are independent because, among other things, they:
- Hired them through an app or service
- Only use them a few hours per week
- Work remotely when they want
- Signed an independent contractor agreement
- Don’t want to be employees
The Internal Revenue Service, Department of Labor, or Workers Compensation Board might not agree these are sufficient to establish an independent contractor relationship. You don’t get to determine the classification; the government agencies do.
Here are some key distinctions among several titles independent workers might use:
- Coaches – Work with individual or groups toward behavioral change
- Collaborators or Strategic Partners – Pre-screen clients and provide some of the services in exchange for a fee
- Consultants (including lawyers) – Analyze problems and suggest ways to fix them
- Educators, Facilitators, or Presenters – Deliver knowledge on a specific topic
- Freelancers – Provide services free from the client’s control and have more than one client or the freedom and time to pursue other clients
- Mentors – Show others on the same career path how they succeeded
- Trainers – Help clients apply knowledge provided by educators, facilitators, or presenters
These workers are often truly independent because:
- They provide services that the client business does not.
- Some might require licensure or specialized training.
- They are free to choose their clients, when to work, and how to perform the services.
Differences Between Employees and Independent Contractors
Your worker is probably an employee if you:
- Pay by the hour or week, rather than a fee fixed by contract
- Require work is performed according to your business’s instructions
- Schedule them to be at work during specific hours or days
Employees are entitled to benefits, such as:
- Minimum wage
- Overtime pay
- Workers’ compensation (medical expenses and lost earnings)
- Short-term disability pay and Paid Family Leave
- Accrued Safe and Sick Leave
Independent workers are not entitled to these benefits, but they are free to set their own rates and hours. They are also free to determine the best ways to perform the work and what to do when problems arise. Although freelance isn’t free in terms of payment, it is free in terms of performance.
The independent contractor is a presumed expert and a vendor, not an employee. The business that hires the independent contractor is a client, not an employer.
There are a few factors that businesses should consider when determining whether a worker is an independent contractor or an employee. These factors include:
- The degree of control that the business has over the way the work is done. A true independent contractor is presumed to be the expert and tells the client business how work will be performed to meet the stated goals. If the client is training the contractor on its methods, using its equipment, and micromanaging the project, the worker is probably an employee.
- The worker’s opportunity for profit or loss due to the services provided. An independent contractor is an independent business, which means it stands to profit from the services provided to the client. It also bears the risk of the job being unprofitable. (Employees get paid for their services regardless of whether their employer is profitable.)
- The worker’s investment in equipment or materials to perform the services. An independent contractor is a vendor that invests in the equipment and supplies necessary to perform the services offered to clients. If the client is making those investments, the worker is probably an employee.
- The worker’s skill level, including licensure. Licensed professionals are usually treated as subcontractors or vendors, but much depends on the other factors. If the professionals are not subject to the profits and losses related to their services, haven’t invested in equipment or materials, have no other clients, and are under the control of another professional or firm, they might be employees.
- The permanency of the worker’s relationship with the business. Contracts typically have an expiration date. If your worker is providing services indefinitely, you probably have an at-will employee.
If you are unsure whether a worker is an independent worker or an employee, it is best to consult an employment attorney. An employment attorney can help you understand the law and make sure that you are classifying your workers correctly.
Misclassification Penalties
If an employee is misclassified as an independent contractor, the business using the worker’s services could be subject to additional and substantial costs, such as:
- Back taxes
- Interest
- Unpaid overtime
- Criminal charges
- Penalties for failure to provide workers compensation, disability, Paid Family Leave, and unemployment insurance benefits
In addition to the financial penalties, businesses that misclassify independent workers can also damage their reputations. They are essentially cheating the government and their employees. This can lead to a loss of trust from customers, employees, and investors.
How to Avoid Misclassification
The best way to avoid misclassification is to consult an employment attorney before hiring an individual worker whose earnings you intend to report on a 1099-NEC form with a social security number. You can also minimize the likelihood of worker misclassification by:
- Getting written proposals from your independent workers
- Pay them based on invoices that align with the accepted proposals
- Give them the freedom to set their own hours and work processes
- Allow them to use their own equipment and materials
- Self-auditing your worker classifications at least annually
Need to check your worker classifications?
Self-Audit Your Worker Classifications Before the State Does It for You