INDEPENDENT CONTRACTOR vs. EMPLOYEES

LABELS AREN’T EVERYTHING – HOW TO SUCCESSFULLY DISTINGUISH YOUR INDEPENDENT CONTRACTOR FROM YOUR EMPLOYEES

Businesses frequently seek to reduce overhead by reclassifying their “employees” as “independent contractors” or “consultants” with the intent of saving on taxes and other employee expenses. Unfortunately, saying it does not make it so.

Misclassifying one’s employees can be dangerous and expensive in the long run. The consequences of misclassification include penalties for miscalculating the number of employees in a company, resulting in failure to comply with federal or state statutes, failure to withhold required taxes, failure to pay social security, workman’s compensation or unemployment insurance, failure to provide employee health or pension benefits, and failure to provide minimum wage or overtime due.

That being said, how do you ensure that your “independent contractor” or “consultant” is actually treated as such? Merely labeling someone an independent contractor or consultant, and handing them a 1099, will not satisfy the various governmental departments (such as the IRS or the Department of Labor) that they are, in fact, an independent contractor. There is much more to the creation of an independent contractor relationship than a label.

Each governmental agency applies its own tests or standards to evaluate the relationship - the federal government tends to focus on the economic reality of the relationship whereas the State focuses more on the degree of control by the employer - but they all seem to start with the proposition that this person is an “employee” until proven otherwise. To prove otherwise, you need to show that the facts specific to this business relationship indicate that this is an “independent contractor”. The “independent contractor” label will more likely stick if that person has their own established business, preferably incorporated; uses their own business cards; provides their own Worker’s Compensation, malpractice and general liability insurance; provides an invoice for services on their own stationery; enters into a written agreement that they are an independent contractor; can decide how, when and where to complete tasks; pays their own expenses; sets and negotiates their own pay rate or project fees; offers their services to other businesses or the general public; is paid fees rather than a salary; and does not receive employment benefits. It is not required that all of these factors apply in each case – but the more, the better.

To protect the company from misclassification penalties down the road, it is best to have an attorney prepare a written agreement spelling out the business relationship and the responsibilities of the parties, so as to clearly establish that this individual is an independent contractor, rather than an employee of the company.

Carolyn Bichoupan, Esq.

Robert Bichoupan, P.C.

175 East Shore Road, Ste. 270

Great Neck, New York 11023

(516) 482-1186

www.bichoupan.com

[email protected]

Prior results do not guarantee a similar outcome. All information posted is general advice only, based upon the rules of NYS, and is not intended to be a substitute for personal legal advice. Although information provided here was accurate as of the date of posting, laws change frequently and rules in other jurisdictions may differ. Therefore, readers should not rely upon these postings but should consult an attorney to discuss their specific factual situation.