As is true with any employment relationship you enter, it's important state, and local taxes, where applicable, and typically, the employer withholds those taxes. Each type of relationship comes with its own advantages and disadvantages. Independent contractors (often referred to as “ employees”) are and not having to pay the federal minimum wage (state and local laws may still apply). compliance with workplace safety and employment anti-discrimination laws, etc. The employer-employee relationship under the FLSA is tested by "economic an alleged independent contractor is licensed by State/local government are not .
Independent contractors are generally free to seek out business opportunities. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission.
The type of relationship depends upon how the worker and business perceive their interaction with one another. Businesses generally do not grant these benefits to independent contractors. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.
Independent Contractor or Employee? A Guide to California Law ()
Under FEHA, a person will be considered an independent contractor if: Despite this exemption, the employee might have a right to sue the employer if the employer engages in discriminatory or harassing activity that is not necessary to serve employees with disabilities.
In some cases, however, businesses or workers may be required to litigate the issue in federal court. But if a business has a right to control the worker in that regard, the worker will be deemed an employee. Also like other tests, federal courts use a variety of factors to determine whether the requisite amount of control exists to create an employment relationship.
They include the following questions: How much skill is required to perform the job?
Who pays for the instrumentalities and tools used for the job? Where is the work performed? How long is the business relationship expected to last? Does the business have a right to assign additional projects to the worker?
How much control does the business have over when the work must be done and how long it will take? Does the worker supply his or her own assistants when needed? Or does the business provide them?
Is the work party of the regular business of the hiring party? Does the business provide the worker with benefits?
So federal courts may consider other factors it deems relevant, when appropriate. Chapter 6 Consequences of Misclassification Businesses that misclassify their employees as independent contractors face serious legal consequences under both state and federal law. They can include, among other things: This commonly happens when an employer fails to pay the employee overtime or a minimum wage. The employer might also owe the employee money for missed meal breaks and rest periods.
If the employee was underpaid as a result of being misclassified as an independent contractor, they can recover many of the costs associated with the misclassification. In these situations, the employer may be liable for additional civil penalties in the following amounts: A employee may bring a PAGA claim by filing a civil lawsuit against their employer.
What’s the Difference Between an Independent Contractor and an Employee?
The waiting time penalty consists of a full day of wages for each day full payment is delayed. Wage Statement Penalty When a worker is treated as an independent contractor, they often do not track their work hours.
Along these same lines, employers may fail to provide itemized wage statements to their misclassified employees. An employer can be fined or sued for failing to comply with the wage statement and recordkeeping requirements of the California Labor Code. Fortunately for misclassified employees, California law will sometimes shift that financial burden to employers.
If the violation was willful, the penalties can be even more severe. Criminal Penalties If a person enters into an independent contractor arrangement with the purpose of willfully evading taxes, they can be found guilty of a felony. The employee also has a right to report that violation to an employee that supervises them.
An employer who punishes or discriminates against an employee for complaining about a misclassification commits unlawful retaliation. Workers in those cases can file a lawsuit against their employer monetary damages.
This impact may be felt financially, or it can come in the form of reduced labor rights. Workers who believe they have been improperly classified have several options, including the following: Resolve the Issue Informally People who are still working for the business should first raise the issue with them and ask to be classified as an employee.
Even if the employer does not reclassify the worker, they will provide a response that the individual can act on. File an Unemployment Claim If a worker is fired, laid off, or otherwise terminated by a business that has improperly classified them as an independent contractor, they can file an employment insurance claim.
The worker will need to explain that they have been misclassified as an independent contractor instead of an employee, and the agency will investigate.
If the person prevails, the unemployment office will award them back insurance premiums, and the employer may be fined. Contact the IRS The tax consequences of being misclassified as an independent contractor can be severe.
As mentioned above, a taxpayer may ask the IRS to determine their employment status for federal tax purposes. The IRS will contact the employer for its version of the facts. The IRS will then issue a non-binding determination. Although the decision is non-binding, any employer who decides to ignore the IRS decision is likely to regret it. Seek Uncollected Taxes The biggest tax consequence for independent contractors is that they must pay all of their Social Security and Medicare taxes.
Employers pay half of the taxes for their employees. If a person believes they were misclassified, they can file IRS Form to report the uncollected social Security and medicare taxes. Guidelines for Classification Legal classification of a worker as an independent contractor or employee varies between jurisdictions and agencies.
While a worker may be treated as a certain classification for taxes, that worker might be treated as a different classification for wage and hour purposes.
Including specific language in a hiring agreement classifying a worker as either an independent contractor or employee is often insufficient by itself. Courts of law and government agencies will look at the actual working relationship between your business and the worker. When managing your relationship with your workers, here are three major areas to keep in mind: Control A main factor in determining whether a worker is an independent contractor or employee is the degree of control that you exercise over that worker.
The more control you exert over the worker, the more likely that worker will be classified as an employee.
Independent Contractors vs. Employees: 3 Key Things to Know
Control can take the form of directing the manner in which the work is performed, setting working hours, or dictating work location. As such, the more training you provide, the more likely that your worker will be considered an employee. By training your worker, you are effectively directing the manner in which the work is to be performed.