Minimizing Risk When Hiring an Independent Contractor

The media has shown us that businesses break the law when hiring independent contractors all the time.

From FedEx’s $228 million settlement to resolve claims that it mislabeled over 2,000 FedEx workers, to Uber’s $100 million settlement to settle a class-action lawsuit brought against it by drivers in California and Massachusetts, corporations are improperly classifying employees and paying the price. In these cases, the courts ruled that these workers were independent contractors in name only, performing the duties of employees, working under the agency of their employer, and fielding costs pushed onto them as independent contractors.

Whether intended or not, improper worker classification is a liability for every employer, not just large businesses, and should be avoided at all costs. Employers unknowingly break the law all the time, however, ignorance is not a defense. If you’re contemplating hiring help, particularly if you are in the delivery, trucking, building maintenance, janitorial, agricultural, home health care, and childcare industries, where misclassification rates are high, here are some tips on how to steer clear of trouble when you hire independent contractors.

1. Determine classification before hiring the independent contractor.

There’s a clear-cut divide between employees and independent contractors. Take into consideration their duties. Unlike employees, independent contractors are seen as individual proprietors who provide goods or services to another entity, typically under contract or verbal agreement. Contractors work as and when required, and can be available for other jobs. They have a significant degree of control over the jobs they accept and when and how the services are provided. Here are some rules provided by the IRS:

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

2. Minimize risk.

According to Wendy Connick of Connick Financial Solutions, if the IRS decides later on that these workers qualify as employees, you’ll likely be facing huge penalties. “One way to feel secure on this point is to ask the IC to incorporate and then hire the business. Auditors are highly unlikely to consider a corporation as an employee.” If the contractor is found to be an employee, you could be responsible for paying workers’ compensation insurance, unemployment insurance, payroll taxes, employee benefits, social security taxes, etc. As an employer, it’s your responsibility to classify correctly, which can be made easier by hiring a self-employed, self-sustained business. You cannot take an employee on as an independent contractor just because it’s less expensive than hiring them as an employee.

3. Above all else, look to the duties test.

Mark Chatow, Esq., of Chatow Law says, “It’s much easier (and safer) to identify who should absolutely be classified as an employee than it is to determine who might pass muster as an independent contractor if there’s an investigation. Even having an independent contractor agreement with workers won’t prevent the IRS or government labor agencies from treating them as employees if the working relationship fails to meet the tests each agency uses to determine employee classifications.”

Additionally, many employers think that having a contract worker sign a waiver or release form means they are protected if the worker decides to sue and claim they were an employee the entire duration of their employment. “By law, workers cannot waive their right to bring claims for a wide range of employment discrimination and wage and hour violations. If a worker has been improperly classified as an independent contractor they can still bring many claims regardless of what they may have agreed to in a waiver,” says Chatow.

With the extent of misclassification being so prominent, the government is taking strong action to combat misclassification. It’s more important than ever to make sure your business is not at risk if the DOL audits your business. The Department of Labor (DOL) collected over $18.2 million in back wages on behalf of 19,000 misclassified employees in 2012 and 2013. If you’re concerned about potential fallout, follow these steps to determine worker classification to save yourself significant trouble.