Many industries employee independent contractors these days. Even some small business attorneys do for billing help, advertising, and more. It’s little wonder why. There are a variety of advantages to working with independent contractors if you are a small business. Since independent contractors are not considered “employees,” under most wage, benefits, and tax laws. That in turn means that traditional benefit need not be offered and that taxes, including unemployment taxes, don’t have to be paid to the State or Federal governments on their behalf, or withheld from their wages. Minimum wage, overtime, and most other employment laws don’t apply to independent contractors.
The work of an independent contractor, therefore, is governed by the contract and not employment laws. The main legal issue though is that the laws governing which workers can and cannot be categorized as independent contractors is very complex and fact specific. Failing to correctly categorize a worker can result in fines, litigation and back pay and taxes.
A Few Factors to Consider
If you are trying to determine if you must classify an individual as an employee or an independent contractor, you may want to ask yourself the following questions:
Is this contractor’s work essential to the operation of your business?
Furthermore, you should decide whether the individual’s work somehow distinct from the work your business does. It can be a difficult distinction to make. Here are some ways to help determine that person’s standing. If you provide the office space, equipment and other tools for the job, that person is more likely to be considered under the laws as an employee rather than a contractor. If you are also investing in the tools and equipment of their helpers, you are probably establishing an employee relationship rather than that of a contractor.
What is the length of time of the relationship you have with this person?
If their work is a regular part of your business, they are most likely an employee rather than a contractor. If they have a specialized skill rather that doesn’t require your supervision, equipment, etc., you may be able to categorize them as an independent contractor.
How are you paying this person and for what period of time?
If you are paying by the job versus hourly, that could be one factor that indicates their contractor status. However, it is not solely determinative. Deciding how long the services might continue can help you decide whether the individual should be classified as an employee or an independent contractor.
Attention to this distinction is an absolute necessity. Even in the absence of control over some of the work details, an employer-employee situation can be determined based solely on who has control over the work, whether the duties are integral to the business and whether the work requires detailed control. California’s wage and hour laws, meal breaks and other employee rights are going to be enforced if the person is found to be an employee rather than an independent contractor. In addition, State and Federal tax law application are affected by the correct classification of the worker. Just because the person is being issued a 1099 statement rather than a W2 doesn’t mean you have established an independent contractor relationship. Further, if one of the parties actually believes they have an employee relationship with you, things can become far more complex fairly quickly.
If you have workers that you have designated independent contractor status to you will want to review that situation with a small business attorney now. Make sure you understand the letter of the law when it comes to California and Federal law requirements in order to can avoid making a costly mistake.