Worker Classification: The Importance of Financial Control

Understanding financial control is a great way to properly classify your workers

Do your workers have financial control over their career? 

Financial control simply refers to the level of control your workers have over their financial aspects while providing services to your business. This is of particular importance when it comes to your independent contractors. 

We are currently in the middle of a series around the regulatory parameter defining when a worker can be considered an independent contractor vs when they must be hired and treated as an employee. 

In a previous post, we delved into employment compliance regulations around behavioral control. And today we are tackling the topic of financial control. 

As with all regulations regarding workers and employees, the goal is to prohibit labeling all workers as independent contractors simply to allow the business from side-stepping taxes, benefits, and other required employer compliance. 

Independent contractors should truly be independent and incur the advantages and risks  accordingly. To that end there are regulations, several in fact, at the federal, state and local level that define when a worker can be an independent contractor and when they can be an employee. 

Our topic today of financial control comes to us courtesy of our friends at the IRS (we will talk about their buddies over at the Department of Labor soon). 

What is financial control? 

In the context of worker status, financial control simply refers to the level of control your workers have over their financial aspects while providing services to your business. 

In other words, financial control is the amount of financial opportunity the worker has while fulfilling their deliverables.

So how does that apply to my business? 

Allow me to bring back the stars of the show–Barbara Business Owner and Frank Freelancer…

When Barbara Business-Owner hired Frank Freelancer, she had to be aware of a few things:

• Frank has independence to take on additional clients. 

Because he does not work exclusively for a single company, he can seek out as many business opportunities and clients as he pleases. He has full freedom to offer his services to a multitude of different clients. As a contractor, he has independence and control over his own financial destiny. 

• Frank operates as a business.

Like any other business, Frank takes the risk to incur profits and losses from his endeavors. 

• Frank Freelancer’s business expenses are his responsibility. 

This includes expenses such as office supplies, equipment, travel expenses, and any other equipment required to complete his job.

What level of financial control do I have over my employees?

Let’s contrast the financial controls Barbara Business-Owner has when it comes to her employees.

Let’s say Barbara has hired Emily Employee. Emily doesn’t have the same level of financial control as Frank Freelancer does. 

As a business owner, Barabara will be responsible for providing office supplies, equipment, and any other business expenses that Emily will need to complete her job.

Unlike Frank Freelancer whose income fluctuates based on the success of his business endeavors, Emily Employee typically receives a consistent salary or at least an expected rate of wages based on hours worked.  

Typically, freelancers are paid a fixed amount per project rather than an hourly rate. Take Barbara for example… when she hired Frank Freelancer to design her website he was paid a fixed amount for the website — no matter how many hours it took to complete it. 

Why is understanding financial control important? 

Simply put, getting to grips with financial control ensures that you’re not violating any labor laws. 

As we discussed behavioral control earlier in this series, financial control is just one of many factors for classifying your workers as an independent contractor or employee.

The classification of your worker status should be based on a holistic evaluation of the entire working relationship. 

Understanding the principles of financial control is crucial for you as a business owner so you can correctly engage with your independent contractors. It helps to establish a clear distinction between your employees and your independent contractors. 

To determine if your workers are properly classified, contact us today to make an appointment.

ClearPath is a leading Human Resources Outsourcing company focusing on assisting employers to leverage the independent contractor labor market. We’re committed to helping business owners stay compliant and minimize the risks associated with their contingent labor requirements. 

No Legal Advice Intended. This article includes general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to contact a lawyer licensed in your jurisdiction for advice on specific legal issues.