There are two classifications of employees – independent contractors and employees. How a service provider is classified has significant implications for the employee and employer. Misclassifying employees is illegal. There are tax revenue considerations, and companies that engage in this practice intentionally can face severe penalties.
The classifications of employees are for the purpose of levying federal taxes. How a service provider is classified determines tax and benefit status. The IRS has found that statutory employees, statutory non-employees, and government workers are often misclassified.
The IRS Criteria for Who Is an Employee
The IRS uses common law rules to determine whether a person providing a service to a business is an employee or an independent contractor. There are advantages and disadvantages for the employee and the employer under the different classifications. For example, independent contractors are not entitled to:
- Minimum wage
- Overtime pay
- Workers’ compensation benefits
- Family Leave Act benefits
- Employer contributions to Medicare, Social Security, and employment taxes
- Anti-discrimination law protection
However, some service providers choose to work as independent contractors as it allows more freedom. They can set their own hours and determine what their rates will be. They can refuse certain jobs if they wish.
A service provider who is an employee is on the company payroll, and the company pays part of the employee’s taxes. Employees may also receive benefits, such as paid vacation or sick time. In some cases, an employer may misclassify an employee as a contractor to reduce their overhead and avoid paying taxes and workers’ compensation claims.
Seven Signs an Employee Is Misclassified
Under the common law rules, there are three categories of questions that identify how a service provider is classified. The title of the service provider – independent contractor or employee – is not as important as the nature of the working relationship. The identifying questions are behavioral, financial, or about the type of relationship the worker has with the business.
These seven warning signs may identify a misclassified employee.
Who defines the work hours: An independent contractor defines their own work hours as long as the job is completed within the time limit set by the business for whom they’re doing the work. They are usually paid by the project and not on an hourly basis.
Who provides equipment or supplies: An employee is provided equipment or supplies by a business, while an independent contractor provides their own tools.
Invoices: The business treats an independent contractor as a vendor. This means the independent contractor provides an invoice to get paid. An employee is paid consistently on a regular schedule without submitting an invoice.
Exclusivity: Independent contractors typically have multiple clients. This means they are handling multiple projects for multiple clients simultaneously. Employees are captive to one company.
Contracts: Independent contractors may have signed an agreement that outlines the intent of the relationship, how much they’re going to be paid for the project, and under what terms. An employee may also have a contract with the business. This contract will document the benefits package, profit sharing, and bonuses.
Core business services: An employee provides a core service for the business. An independent contractor usually provides supplemental services. One example where this could become a problem is if a business provides website design for clients and their designers are independent contractors.
Decisions about work: An independent contractor may refuse to take any job they don’t want to perform. An employee must do the work they’re directed to undertake.
Contact The Vaughn Law Firm for Help Today
There are implications for both the employee and employer when a service provider is misclassified. The employee often experiences more of the negative implications. For example, employees are protected by anti-discrimination laws and afforded benefits under the Family Medical Leave Act that are not provided to independent contractors.
If you believe you may have been misclassified by an employer, or if you want to ensure you are classifying your employees correctly, contact The Vaughn Law Firm today. Our experienced employee rights attorneys can help. Contact our office today at 877-615-9495 for a free, confidential consultation.