Improperly Classifying Employees as Independent Contractors
A common trend among new businesses is to hire workers as “independent contractors” rather than “employees.” Hiring independent contractors can provide numerous advantages for small business owners. The accounting workload is drastically simplified. The employer is not required to pay employment taxes, unemployment insurance, workers compensation, or provide health insurance benefits.
Some businesses even require their workers to sign agreements that expressly state that the worker is employed as "independent contractor." However, an independent contractor may actually be considered an employee in the eyes of the law—even if the worker signed an independent contractor agreement.
Courts and governmental employment agencies will essentially “look under the hood” of the agreement to see if an employer has actually misclassified a worker as an independent contractor.
Business owners who misclassify workers as independent contractors may be required to repay back taxes and unemployment insurance benefits. They could also face sanctions including fines, penalties, and in some cases even jail time.
An investigation by the Tennessee Department of Labor may be triggered when a terminated worker, who is classified as an independent contractor, files for unemployment benefits. This is classic regulatory red flag. A signed independent contractor agreement is not an ace in the hole.
State investigators will look at the following factors to determine whether the worker is an independent contractor:
How much control does the business owner exercise over the independent contractor?
Does the independent contractor use his own equipment and tools?
Does the independent contractor work for other businesses?
Does the worker set his own hours?
Does the business owners control or direct how work is performed?
Is the independent contractor paid hourly or have a set salary?
The main factor that distinguishes an independent contractor from an employee is control. The more control an employer exerts over a worker, the more likely the worker will be considered an employee.
Before hiring a worker as an independent contractor, business owners should make sure the worker is not actually an employee. Failure to properly classify a worker could result in severe business-ending sanctions.
For additional information on the distinctions between independent contractors and employees, visit the Tennessee Department of Labor and Workforce Development's website.
If you have questions regarding the status of your workers, contact our office to schedule a consultation.