Employee vs. Independent Contractor – Do You Know the Difference?
Independence is the ability to live life on your own terms: to be able to do whatever you want—whenever, wherever, and however you want to do it. As Americans, we tend to prize and celebrate our independence (and not just on the 4th of July). We’ve embraced technology, such as video conferencing and smartphones, that liberates us from traditional office and home environments, and amplifies our sense of freedom and autonomy.
But independence comes at a price. When you’re truly independent, no one else can be held responsible for your actions. No one else is going to pay for your healthcare or taxes. No one else is looking out for your well-being, paying attention to your career progress, or making sure you have job security. These are the compromises you have to make when you work for yourself.
Misclassification Is on the Rise
Unfortunately, an increasing number of companies are obliging members of their workforces to accept the downsides of independence without allowing them to reap the associated benefits. More and more organizations—including many vehicle dealerships and transportation companies—are misclassifying employees as independent contractors: stripping personnel of benefits such as overtime pay and vacation time while still expecting those people to act like employees.
When we interviewed Steve Roppolo from Fisher Phillips, his first comment was:
Over the past 3 or 4 years, I’ve seen the vast majority of litigation stemming from wage and hour causes of action: claims that an employer didn’t properly pay its employees overtime, or minimum wage or both.
(PS – His full interview is great, you can download it here)
In other words, if you’re not paying someone’s Social Security and Medicare taxes, you can’t force that person to come into work on a Saturday. In fact, that someone gets to decide if and when they choose to visit the office at all.
True to the American spirit of independence, the Department of Labor and the Internal Revenue Service take misclassification extremely seriously. If the DOL or IRS finds out that you’re treating your employees as independent contractors, you can expect to face a heavy penalty—not to mention the threat of legal action brought by misclassified individuals.
What Sets Employees and Contractors Apart?
Do you know the difference between an employee and an independent contractor? If you’re not sure how to classify someone, consider the following questions:
- What degree of control do you exercise over the person in question? Do you set the person’s schedule and decide when they can come and go? Are they allowed to work for other companies?
- To what extent do you determine the individual’s ability to make money? Do you pay the person on a job-by-job, project-by-project basis, or do they bring home a fixed monthly or yearly amount?
- What level of skill and initiative does the job require? Are you telling the person what to do and how to do it? Are you invested in their training, or do you expect them to bring the necessary expertise to the job?
- How permanent is the working relationship? Is it an ongoing, predictable pattern, or a gig—or series of gigs—that may only last a few days or weeks?
- How integral is the relationship to your business? Does the individual provide a critical service to your customers or manage a core administrative component of your organization? Could you live without them, or would you need to find an immediate replacement in order to stay in business?
That’s not all. Download our “Employee or Independent Contractor” worksheet to learn everything you need to know about how to categorize employees and independent contractors.
After you’ve taken a look at this worksheet, schedule a call with us! We’ll go over your current classification status, answer your questions, and give you information about how to comply with labor laws to avoid costly regulatory or legal action.
