Sometimes, employers purposely treat their employees as independent contractors to avoid paying for employee benefits and taxes. Other times, some companies make genuine mistakes when interpreting confusing and lengthy guidelines. For these reasons, the Department of Labor (DOL) and the IRS are interested in how business owners classify their workers. Luckily, hiring an employer of record service provider allows you to steer clear of the common mistakes employers make when working with independent contractors.
What You Shouldn’t Do When Working With Independent Contractors
MISTAKE #1: Failing to consider the aspects of the employer-worker relationship.
It’s important to note that the distinction between a full-fledged employee and an independent contractor impacts the major aspects of the worker experience. These aspects include how the worker performs their work, how the worker is paid, their eligibility for benefits, and how the employer pays taxes.
If you want to properly classify your workers, you must not base your classification decision on only one factor. Although the U.S. Supreme Court confirms that no single test or rule applies to determining whether a worker is an employee or an independent contractor, the court maintains that the total situation or activity is what controls the classification.
As an employer, you’ll want to evaluate the amount of control you exert over the details of the work performed. The more control you exert, the more likely your worker is an employee. In contrast, your worker is likely an independent contractor if you exert almost no control.
MISTAKE #2: Using the written contract to determine worker classification.
Contrary to popular belief, a signed contract that defines a worker’s classification doesn’t supersede other considerations. Your basis on how you classify a worker should be the facts of their relationship with your company rather than what is stated on a written contract, regardless if an attorney drafted, signed, and notarized this document.
For example, if your company hires a worker and you give them specific instructions on how they should get the work done, or what time their work starts and ends, the IRS won’t recognize them as independent contractors, even if their contract states that they are.
MISTAKE #3: Paying your employees and contractors similarly.
An employee is generally paid a regular wage, most on an hourly basis, for a determined period. Alternatively, independent contractors are usually paid a flat fee to get a job done. However, some companies pay independent workers an hourly fee for the time they spend on the job versus a single lump sum.
MISTAKE #4: Using benefits as the determining factor.
Employers usually provide their employees with benefits, such as paid time off (PTO), retirement saving plans, and health insurance. However, the lack of benefits doesn’t necessarily mean that a worker is an independent contractor. Companies aren’t obliged to provide benefits except for those that are required by law, such as the Affordable Care Act which mandates companies to provide health insurance in specific circumstances.
Although independent contractors don’t get benefits, some employers mistakenly believe that they can choose to treat them as employees and provide them with benefits. In some cases, companies make the mistake of treating a worker as a contractor and paying them a higher rate without offering benefits.
Do You Need Employer of Record Services?
At ClearPath, we offer expert, personalized service to help you get back to focusing on your business goals. We’re here to employ your W-2 contingent workers, take over Human Resources and Payroll functions, and ensure compliance with all labor laws and regulations. Contact us today to make an appointment.