While the classification of independent contractor versus employees has been a hot topic for a while, it is coming to the forefront again and should be something you review for your organization right now. New York recently became the 15th state to sign the agreement allowing the IRS and Department of Labor to share information to identify independent contractor misclassifications. Washington and California signed the agreement in 2011. And we expect that businesses will continue to receive increased scrutiny in 2014 as more and more states sign the agreement. By taking the necessary steps now, you can alleviate future headaches and fines.
Test for Defining an Independent Contractor
If you are considering independent contractor as the classification for your new hire you will want to verify that the engagement meets the considerations the Department of Labor takes into account during their evaluations.
If any of these considerations are questionable, the employee classification is the likely designation.
The Department of Labor uses the following to evaluate independent contractor status:
- Control Factors – Independent contractors control their own work, set their own hours, obtain their own training and are generally evaluated on the end result only.
- Financial Controls – Independent contractors provide their own equipment and tools and have the ability to work for many employers at the same time.
- Relationship – The IRS looks at how the parties work together, not just whether the independent contractor pays their own taxes. They look for a verified business license, the independent contractor’s payment of taxes, the above control factors and the permanency (length of time) of the relationship.
- Analyze your current classifications and create a process for ensuring you are classifying new hires correctly.
- Requirements may differ from state to state so research any differences for the states within which your employees and independent contractors work.
- If you decide to use the independent contractor classification you may want to contact an attorney to ensure the classification is indeed correct.
- Put in place a legally reviewed Independent Contractor Agreement that covers your liability and protects your organization’s proprietary information and states that the nature of the relationship is work for hire.
- We also recommend obtaining Emergency Contact Information for your independent contractors and liability insurance that protects you from applicable independent contractor negligence.
You can learn more about independent contractor classifications here, or purchase our INDEPENDENT CONTRACTOR VERSUS EMPLOYEE CLASSIFICATION RESOURCE GUIDE (FOR WESTERN WASHINGTON STATE BUSINESSES).