You think you may know the difference. The government may think otherwise..
EMPLOYEE OR INDEPENDENT CONTRACTOR?
For legal and tax reasons, it is imperative that employers properly classify the people who work for them. Oftentimes, New York companies hire independent contractors to complete any number of tasks. One reason for hiring independent contractors is to save money; companies are not required to provide medical, disability or retirement benefits to independent contractors.
AVOIDING CLASSIFICATION ISSUES
There are a number of steps a company can take to avoid having an independent contractor potentially classified as an employee. Some of these steps start as soon as an agreement is reached between the company and the contractor. They include:
Supervision – independent contractors should be performing tasks without direction or immediate supervision. While it is assumed an independent contractor will be given specific tasks, only general direction should be provided.
In-house work – unless absolutely necessary, the independent contractor should never be invited to work in the office. They should not be included in company functions, meetings, or invited to corporate outings.
Company equipment – the independent contractor should provide any equipment that is necessary to do the job; and unless absolutely necessary, materials should not be provided. Keep in mind, the more equipment you provide, the more likely it will be that an independent contractor will be classified as an employee.
Company policies – independent contractors should not be provided employee manuals, business cards, stationery, or company policy manuals. Any time these documents are provided, you run the risk of having an independent contractor classified as an employee.
Working hours – – independent contractors must be allowed to set their own hours; any control over their hours could result in them being classified as an employee. Keep in mind, independent contractors are considered self-employed, and as such they set their own working hours.
Payment – unlike employees, independent contractors should be required to submit invoices for services and be paid in compliance with the company’s policy for other outside vendors. Whenever possible, avoid weekly, bi-weekly or monthly payments that are in line with employee pay periods.
Contracts and agreements – contracts should be drawn up with specific termination provisions, as well as the specifics of the task the independent contractor is to complete. Once the original task has been completed, a new contract should be written detailing future tasks.
The penalties for improperly classifying an employee versus an independent contractor can be very harsh. One way to avoid confusion or legal action is to use a temporary agency at which the independent contractor is considered their employee. However, it is important to be aware that there is a potential for you to be considered a joint employer when a temporary agency is used.
Independent contractors can fulfill a number of tasks for businesses including accounting, website maintenance, and even Accounts Payable. However, running afoul of the distinction between employer and independent contractor can be very costly. Fines, repayment of back taxes, as well as inclusion in benefits programs may all be required if the Internal Revenue Service determines an independent contractor has been misclassified.
If your company is considering using the services of an independent contractor, we strongly recommend you schedule a consultation with Solomon Richman, P.C. at (516) 437-6443. Don’t wait until you’ve been told that there is a suspicion you are in violation of independent contractor rules; call us today and let us help you avoid this problem.