By Julie Morris
For many business owners, there comes a time when the success of the business brings with it the need to confront hiring aligned to meet increased demand.? Because having employees triggers a series of federal and state taxes, to say nothing of federal and state regulations, many business owners opt for what they perceive to be the simpler solution of retaining Independent Contractors (?ICs?), who are not subject to federal and state withholdings, ?and not subject to the host of regulatory restrictions placed upon employees.
Caution is advised. While business owners may think that a worker?s status as an independent contractor or an employee depends on what the company and the worker decide; as long as both parties agree on the terms of the relationship, and have a contract in place, you would be wrong.
Imposition of a label or title does not render an engagement either one of employment or that of a contractor. Rather, determination of employee or contractor status is influenced by ?multiple factors.? In fact, ?the government can and often does disagree with an employer?s determination and as a result, will declare the status a misclassification. The truth is, misclassification disputes are common, and more than one governmental agency is entitled to effectively second-guess a business owner?s determination, including specifically the Department of Labor and the Internal Revenue Service.? What is more, the workers themselves have the ability, after having entered into an independent consulting agreement, to later contest the validity of those terms.? For these and other reasons, business owners are wise to approach employee versus contractor determination with care and analytical focus, based on your business? needs.? There is truly no one size fits all approach that works well in this circumstance.
In determining whether a relationship is that of Employee or an Independent Contractor, employers are encouraged to at least consider the IRS factors, federal Department of Labor standards, and applicable state regulations, if any. ?The IRS has long considered 20 factors?that fall into three categories – behavioral control, financial control and the relationship of the parties ? when determining worker status. ?However, not all states agree with the IRS? approach to classification. ?As a result, it is possible that a worker may be treated as an independent contractor for federal employment tax?purposes, but an employee for purposes of state unemployment benefits or workers? compensation. ?We recognize the need for more certainty amongst business owners and understand that back taxes and penalties can have a crippling effect on a business. ?Accordingly, we encourage clients to remain cognizant of both state and federal guidelines when attempting worker status determinations and to seek legal review and guidance for further assurance.
Smart Tip: Determining independent contractor status has always been a fact-intensive minefield. ?Be realistic about the hiring needs of your business.? Understand not just the IRS and the DOL factors, but take the time to consider the reasons behind the factors themselves.? Draft Independent Contractor Agreements (with the assistance of qualified legal counsel) that detail the nature and scope of the relationship.? And, be consistent in your treatment of contractors as contractors; remember that they are not employees.
The AR Group’s experienced attorneys are here to help! ?If you have any questions concerning employee classification or need help with an Independent Contractor Agreement, please contact Julie Morris at julie@theARgroup.com.