In between the flow of head-shaking news stories over the past few weeks, you may have seen something about Uber’s recent issues in California. A court in the Golden State recently issued a ruling requiring Uber to reclassify it’s drivers as employees (instead of independent contractors). While this has no impact on your small business here in Pennsylvania, it’s still noteworthy. Every successful business has to hire new people in order to grow. Every worker will need to be classified as independent contractor or employee. Understanding the difference is vital to any business looking to remain on Uncle Sam’s good side.
Importance of Worker Classification
How a business classifies it’s workers is important for two reasons. First, it helps determine the business’s responsibilities to its workers. Generally speaking, employers owe employees more responsibilities than independent contractors. For example, employers must pay their employees minimum wage, which is not the case with contractors. Having employees also comes with the obligation of having to pay payroll taxes. Employers do not have that same responsibility when working with independent contractors. There are more differences, but that is enough to illustrate the point.
The second reason is because misclassification of workers is costly. In Pennsylvania, it is presumed that workers are employees unless the employer can prove otherwise. Regardless, employers often seek to classify their workers as independent contractors in order to avoid the additional responsibilities owed to employees. If the IRS or another government agency determines that an employer misclassified their workers, the business will have to make up for the responsibilities it tried to avoid. This could include payment of back wages and overtime, payment of tax and insurance obligations, and institution of required employee benefits. In addition, the employer could face fines and other penalties.
When it comes to classifying workers, the stakes are high. But, avoiding mistakes is easy as long as you take the time to understand the difference between employees and independent contractors.
The Key Factor is Control
The key element to consider when it comes to properly classifying workers is control. In other words, how much control does the business have over its workers. The more control the business has, the more likely it is that workers should be considered employees. A business should consider all aspects of the working relationship when deciding how its workers should be classified. Here are some of the factors that may arise.
- What documents exist outlining the relationship? Is there an employee handbook? This would obviously indicate that the worker is an employee. Is there a contract? An employer should have written contracts with all of its independent contractors. The contract serves as proof of the nature of the relationship. However, it cannot be used as a tool to misclassify someone who was actually working as an employee. Proper classification requires consideration of the entire working relationship.
- How permanent is the working relationship? The longer someone continuously works for a business, the more it begins to look like they are an employee. This is particularly true if the are not working with anyone else during that time.
- To what extent does the business control or direct how the worker does their job? Think about when you hire a contractor to do work on your home. You don’t stand there and tell them how to do the job. You tell them what you need, and trust that they have the knowledge and skill to get it done. Same principal applies to businesses. The more independence the worker has, the more likely they are to be classified as an independent contractor.
- Who provides the necessary tools and supplies? Does the worker bring their own tools, or does the business provide them? A worker who brings their own tools and buys their own supplies is more likely to be viewed as a contractor than someone who doesn’t.
- To what extent does the worker control how they are paid? Generally speaking, an independent contractor has more ability to negotiate payment than an employee. This applies both to the amount and frequency of payment for work.
Independent Contractor or Employee?
Ultimately, it is up to the employer to decide how to classify new hires. It is important to get it right or, as I mentioned above, the business could face steep consequences. If you own a business, and you’re thinking about hiring help, take the time to consider your options. In the end, make a decision that doesn’t put what you’ve worked hard to build at risk. And remember, it can’t hurt to talk to a professional.
M. Zane {+} Associates is here to provide you with the answers you need to make the best decision for your PA small business. If you’ve got questions, give us a call at (267) 475-7052, or schedule a consultation online and receive a call at a time that is convenient for you.