Many employers have to determine whether a new hire is going to be an employee or an independent contractor. Often, this decision is made at the outset because the employer needs to know whether to withhold taxes when issuing a first paycheck. In fact, taxes are only the first of many reasons an employer needs to know the difference between employees and independent contractors. Issues can arise down the line such as liability and unemployment claims.
An employee’s mistakes and actions are generally attributable to the employer unless the employee is somehow acting outside of his or her employment. Actions of independent contractors, on the other hand, generally do not create a clear line of liability for a separate business.
Say, for example, a realtor is hired to sell a house. Once the property has been selected by a purchaser, a home inspector provided by the realtor comes in and determines that everything appears to be in good shape. The sale closes and everyone goes their separate ways. Unfortunately, a month after the new owners move in, the water heater blows causing extensive water damage. Naturally, the upset homeowners decide to bring a lawsuit. Who is liable in this situation and to what extent? It will largely depend on whether the home inspector is employed by the realtor or if he or she is acting as an independent contractor.
When determining liability, courts, attorneys, and the IRS will look at a business’ decision to designate someone as an independent contractor versus an employee. However, these entities will also look at the day to day relationship a business has with this worker. Even if a worker is classified as an independent contractor by the employer, there is still a possibility the worker has been misclassified. In other words, when a worker is acting as an employee in every respect, but is simply being called an independent contractor, the employer will not be protected from liability.
Generally speaking, the more control you have over a person’s work and pay, the more likely he or she will be classified as an employee. Here are some questions you should be asking yourself when making the designation of employee or independent contractor:
- How much control do I have over this person’s job?
- Can I hire and fire this person freely?
- Can I decide the hours this person works or the methods they use when working?
- Do I need to supervise this person when they are working?
- Is this person’s business somehow distinct from my own?
- Does this person do similar jobs for other employers?
- Does this person work out of a separate building?
- Do I provide this person with the tools, computers, etc. he or she needs to complete the work?
- How is this person paid? Hourly? One job at a time?
- How much independent skill does this person need to complete their work?
- How different is my relationship with this person from my relationship with my other employees?
These guideposts can help you figure out whether or not someone is working for you as an employee or as an independent contractor. It is important for the security of your business that you know what your legal relationship is with the people you hire. An attorney can help you navigate this area effectively and can support you in ensuring you are properly protected down the line.
Employee management can be tricky. So can navigating employment laws. Reach out to Business Law Southwest if you find yourself struggling with independent contractor issues. We have Business and Tax Attorneys as well as HR Advisors ready to listen to and guide you through all of your employee issues.
Contact Business Law Southwest today and schedule a time to review employee issues associated with your companies.