In the last post we looked at hiring unpaid interns and found that it’s very difficult for a company to meet the requirements necessary to legally engage free labor. But payment for work can then lead to the creation of an employer-employee relationship, which entails some complicated business and legal issues. If instead you hire a worker as an independent contractor, they are subject to self-employment taxes while you avoid withholding employment taxes and avoid paying for workers’ compensation insurance, Social Security, Medicare and unemployment taxes.
Aside from the tax and insurance implications, hiring workers as independent contractors impacts your business’ liability for that worker’s actions. If the contractor becomes involved in legal wrongdoing while working, generally the hiring party will not be held legally responsible, whereas in an official employer-employee relationship, the employee is acting on the employer’s behalf as his agent, so according to the law the employer is responsible for the employee’s actions.
A few years ago at a wedding in New York, a wedding guest tripped and fell over the leg of a videographer, who was an independent contractor for a videography company hired for the wedding. The injured guest sued the independent contractor as well as the videography company that hired and sent the contractor. A New York court determined that the injured guest could not maintain a case against the videography company because there was no evidence that the videographer was technically an employee rather than just an independent contractor, and therefore the company was not legally responsible for the videographer’s actions.
So now you’re thinking, “Great, all my workers should be independent contractors.” Well, it’s not that easy, and the requirements are not exactly clear-cut. The simplest way to state the general rule is that you can hire a worker as an independent contractor if you have the right to control the result of the work, but not how it will be done. When courts analyze an employment scenario to determine if a worker has been properly classified as an independent contractor, the analysis is very fact-specific, and the court looks at the facts that provide evidence of the degree and type of control you have over the worker and the worker’s amount of independence.
First, look at your behavioral control over the worker.
The more detailed instructions you give a worker, the more likely that you have an employee on your hands. Examples of detailed instructions may be:
• When and where to do the work (i.e. at your office, or can they work from home?);
• What tools or equipment to use;
• Where to purchase supplies;
• What work must be performed by a specific worker (i.e. can the worker subcontract the work to someone else?);
• What order or sequence to follow when performing the work.
If you evaluate your workers based on the details of how the work is performed rather than the end result, your worker is probably an employee and not an independent contractor. Additionally, independent contractors tend to use their own methods, so if you’re providing your workers with detailed training on how to do the job, this is strong evidence that the worker is an employee.
Second, examine what sort of financial control you have over the worker.
Independent contractors often have invested in their own equipment and have expenses that are not reimbursed. Additionally, contractors are typically free to seek out other business opportunities while also performing work on your behalf. One of the most important factors under the financial control element is the method of payment. An employee usually receives a regular wage (hourly, weekly, salary, etc.), but an independent contractor is usually paid a flat fee for the job.
Third, analyze how ‘official’ the employment relationship seems.
Are there written contracts stating whether the worker is an employee or a contractor? The contract will not be determinative, but it is good evidence. If you do not have a written contract, does your worker think of herself as a regular employee of your company, even though she may be paid as an independent contractor? This kind of misunderstanding by the worker can weigh against you. Ultimately, if you want to hire a worker on an independent contractor basis, you should enter into a written independent contractor agreement. Also look at whether your worker is receiving benefits like insurance, paid vacation or a pension plan, since businesses should not grant those sorts of perks to independent contractors. Hiring a worker for a specific project or period, rather than indefinitely, can also evidence that the intent was to hire an independent contractor rather than an employee.
As a business owner you must weigh all of these factors and decide what kinds of duties and expectations you will have for your workers, and whether they are properly classified as independent contractors or employees.
If you decide that your workers qualify as independent contractors you must have them complete a W-9 for your records. If you paid or will be paying an independent contractor $600 or more in a calendar year, a Form 1099 needs to be completed, with a copy given to the contractor by January 31st of the year following payment, and a copy sent to the IRS. If you are still unsure whether a worker is an employee or an independent contractor, you can file an SS-8 form with the IRS, who will determine which status is correct. Employers who misclassify their workers as independent contractors can be faced with serious tax bills for back taxes, plus penalties for failing to file those taxes and failing to fill out the required tax forms.
As always, my goal is to help you navigate the law as it pertains to your creative business, but the above should not be construed as specific tax advice or legal advice. When in doubt, consult an accountant, tax specialist, and/or attorney who can help you analyze your specific situation and advise accordingly.