It’s not uncommon for businesses today—large and small, public and private—to utilize a diverse workforce of full-time employees, part-time employees, and independent contractors. To provide the top notch service our businesses need to be competitive, it is necessary to stay flexible and develop new strategies of meeting client needs.
That fast pace can come at the risk of some pitfalls though, and misunderstanding the difference between an employee and an independent contractor is an easy one to make. In the face of changing legislation (including the Affordable Care Act, the Fair Labor Standards Act, etc.), it isn’t difficult to misclassify employees as independent contractors, and unfortunately, it is one of the most serious problems facing affected workers, employers, and the economy in general.
To start, we must understand the difference between an employee and an independent contractor. Some of the most obvious delineators of an independent contractor include:
- If the worker supplies his or her own equipment, materials, tools or laptop
- If all necessary materials are not supplied by the employer
- If the worker can be discharged at any time and can choose whether or not to come to work without fear of losing employment
- If the worker controls the hours of employment thus indicating they are acting as an independent contractor
- Whether the work is temporary or permanent
A couple of examples:
Examples of Independent Contractors
- An of counsel attorney brought in on as needed basis to provide specialty expertise regarding tax liabilities, and is also providing this expertise to other firms
- A freelance bookkeeper who comes in 1-2 times a month to handle billing and budgeting, but who also works for several other businesses
Examples of Employees
- Office and/or marketing manager who works 30 hours a week and is the sole employee responsible for his or her duties and does not provide these services to other employers
- Part-time paralegal who is the primary provider of these duties in your office
The nature of the work will help with the classification. When work is considered integral to the business, it is more likely that the person is an employee. Work that is temporary and non-integral may imply independent contractor status.
A full breakdown and test of these regulations can be found on the Department of Labor website.
Unfortunately, misclassified employees are often denied access to critical benefits and protection to which they are legally entitled, including minimum wage, overtime compensation, family and medical leave, unemployment insurance and safe workplaces. It can also generate substantial losses to the federal and state governments in the form of lower tax revenues, state unemployment insurance and workers’ compensation funds.
With all of this in mind, the U.S. Department of Labor (DOL) has done two things that employers need to be aware of:
- The “Suffer or Permit” Standard, as illustrated in the Administrator’s Interpretation 2015-1
- Additionally, the DOL and federal government have increased the number of auditors working to weed out expressly these misclassifications, and penalties may be likely for those found to not be in compliance with the law.
Though the standards can be confusing, it is important to keep in mind that they are not open to interpretation by employers. The law is set, and if questions arise, we recommend consulting with an HR professional or employment attorney before making any final classification of a new or existing hire or entering into a relationship with an independent contractor.
“Kelley Helgeson is a Principal in MCM’s HR Consulting Services division. Kelley is an HR leader with extensive experience creating and leading HR programs, developing strategic alliances, and establishing herself as a business partner serving a variety of industries.”
Academy Guest Blogger
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
- Employees vs. Independent Contractors, Understanding the Difference in the Face of Increasing Audits - July 31, 2015
- The Cost of Less… - December 26, 2014