Recently, some governmental agencies have stepped up their efforts to have various “independent contractors” classified as employees and have been taking action against business owners. Many small business operators attempt to have individuals who are providing services to them be classified as “independent contractors”, in order to avoid the cost and paperwork of reporting an individual as an employee.
The law is fairly clear on this issue, and I find myself frequently admonishing owners who have persons that they consider to be “independent contractors” but are actually employees. In essence, one who provides services to your business for whom you have set the compensation, hours of service, restriction as to what they can be doing (such as providing similar service to another person and/or restricting when they can provide services exclusively for you) and for whom you provide the tools that are necessary for them to accomplish their work (which can include such items as desk space, office space, telephones, etc.) fall within the general definition of an employee. There are some severe consequences when a business owner reports someone who is actually working for them as an “independent contractor”, when they are in reality an employee.
Failure to properly report an individual as an employee could result in some substantial fines and levies against an employer. These fines and expenses could include the responsibility for paying both halves of unreported earnings, social security tax obligations, and in some cases could result in the obligation to pay actual income taxes that should have been withheld as it relates to the earnings. In addition, if there should be an injury while the employee is working for you, you would, in all likelihood, not have coverage under workers’ compensation and if the injury was caused to a third person (such as an automobile accident during the performance of the individuals job task), your general liability insurance carrier may take steps in order to avoid providing coverage.
When discussing this matter, many individuals will state that they will “never be found out.” Outside of a normal audit through either the Federal or State agencies (Internal Revenue Service, Franchise Tax Board, or EDD) which may disclose the information which triggers an audit of the “independent contractor’s” status, there is the real risk that the agencies will be alerted to the issue of an employee being paid as an “independent contractor,” in the event that the employee is terminated and seeks to get unemployment insurance, there is an injury and the employee attempts to collect state employment disability, or when an individual goes to retire and the Social Security Administration does not discover that any wages have been paid in on behalf of the employee.
If you truly feel that the individual who is providing services is an “independent contractor,” you need to take certain steps in order to document this fact and to provide adequate protection for yourself. First and foremost, you need to have a proper “independent contractor agreement” prepared which clearly sets forth that the “independent contractor” is not employed, is engaged to provide certain specific services, and is also free to continue to conduct other business relationships independent to services being provided to you. In addition, planning can be done with the “independent contractor” to assure that they meet the status by verification that they truly have their own “business.” Some of the items that will help to clarify that the person conducts his own business is for them to obtain the appropriate business licenses, file the appropriate DBA, be operating under a separate corporation, and demonstrate that they have other clients.
A qualified business advisor (an attorney or an accountant) should be able to assist you in determination as to whether or not an individual classifies as an “independent contractor” or is in reality an employee. In some cases, with the appropriate planning, a qualified attorney should be able to develop the frame work to protect you in establishing that the individual providing assistance to you is truly an “independent contractor.”