Employee Or Contractor, Which Are They?

Law Blog

In the new business world, it's often typical to have staff that fall somewhere between full-time employees and independent contractors. While having a contractor on your staff can be a cost-saver, there are also some pitfalls to mislabeling someone as a contractor. Here is a guide to help you decide how to label your people.

Benefits of Labeling Employees as Contractors

There are a couple of benefits to labeling people as contractors. First of all, you will be off the hook for offering the same benefits that your long-term employees have access to. This could include retirement savings accounts and other perks. You will also not have to pay the employer portion of their taxes; as an independent contractor, staff will be completely responsible for their own taxes. And, you are not required to buy worker's compensation insurance for a contractor on your team.

Risks of Labeling Employees as Contractors

While that can seem like a dream come true, there is a big risk in mislabeling someone as a contractor and being discovered. For instance, the IRS is well aware that some companies will try to call people "contractors" to reduce their taxes. If the IRS finds you guilty of this, you could be subject to some pretty hefty fines. And if a contractor gets injured and sues you, and they are discovered to actually be an employee, you can look at penalties for not carrying appropriate worker's compensation coverage.

Then, there is the separate issue of having a legitimate contractor sue for injuries. Since they won't be receiving any worker's compensation, the sky is the limit on the damages that a judge could award for personal injury.

What Does a Contractor vs. Employee Look Like?

Government entities will use various criteria to determine whether someone should be considered an employee or a contractor. The number of hours they work, as well as their longevity with the company, will be considered. Type of work, rates charged, and whether the person works for other companies may factor in as well.

How to Get Legal Advice

When you're deciding whether to label your people as employees or contractors, it's wise to get legal advice. A lawyer who specializes in labor and employment law is the perfect person to contact. They can help you classify employees as one or the other based on their attributes. They can also give you a better picture of what the repercussions for your business would be if you ran into trouble with a contractor.  

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30 November 2016