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Employers and Employees Should Understand the Difference between Independent Contractors and Employees

There are two general categories of workers, independent contractors and employees, and how the state and federal government classifies your workers will significantly affect your cost of doing business.

A business pays independent contractors for the work they do and does not provide benefits, such as paid time off, health insurance, workers compensation insurance, or withhold taxes.  In addition, independent contractors are not protected by numerous laws governing employment, such as anti-discrimination and payment for overtime.

Independent Contractor vs. Employee

The IRS tests for determining if a worker is an employee or independent contractor are as follows:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the employer? These include how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies, etc.
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)?
  4. Will the relationship continue, and is the work performed a key aspect of the business?

There is no “magic” or set number of factors that render a worker an employee or an independent contractor, and no one factor stands alone in making this determination. The key is to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. If an employer wants an “official IRS determination,” then the employer may file IRS Form SS-8 to obtain same.

If you are unsure whether a worker is an employee or independent contractor, then a one of our attorney can review your employment practices and clarify the legal status of your workers. Furthermore, our lawyers can try to pre-empt litigation risks by drafting employment and independent contractor contracts.

Contact the business lawyers at Lundy, Beldecos & Milby to understand your full legal obligations for your workers.

 

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