How to Classify an Independent Contractor vs. an Employee
When your business grows to the point where you need to have people doing work for you, you are faced with making an important decision. Are these workers employees or are they independent contractors?
How these workers are classified makes a big difference. Business owners have responsibilities under federal and state taxation laws that differ for employees and independent contractors.
Workers who are classified as employees have certain rights and protections that independent contractors do not:
- Protection from discrimination
- Coverage under workers’ compensation unemployment insurance
- Coverage under minimum wage and overtime laws.
While many business owners prefer to pay workers as independent contractors to avoid dealing with the responsibilities and costs of having employees, business owners must be aware that the penalties for misclassification are severe. Even if this error has been made innocently, if it is determined that a worker should be classified as an employee and not an independent contractor, business owners face back payment of money owed as well as fines and penalties under both Maryland and federal law.
Classifying workers as independent contractors or employees can be complicated, distinctions are not always obvious, and mistakes are easy to make. If you are a business owner and have people working for you, it makes sense to speak with an experienced business law attorney to make sure you are classifying your workers correctly.
Maryland business law attorney Rebekah Lusk and her associates at Lusk Law, LLC know the challenges involved in hiring and classifying workers and are here to help. We will work with you to review your employment contracts and situations, make sure everything is done correctly, and answer any questions you may have.
Don’t let worker classification become a major problem. Contact the Frederick, MD, business law attorneys at Lusk Law LLC today.
Call Lusk Law at (443) 535-9715 to schedule a consult now.
How to Classify an Independent Contractor Vs. an Employee
The main consideration in determining whether a person is an employee or an independent contractor is the business relationship that you have with the person. It is not uncommon to have people working for you that you are paying as independent contractors, but who are actually employees.
Determining the status is defined by federal and state laws. Federal laws include:
1. The IRS Test
The IRS uses three factors to determine whether a worker is an employee or an independent contractor, and these factors are further broken down into a 20-Factor Test. The three categories are:
- Behavior — Does your company control or have the right to control what the worker is doing and how the worker does the job?
- Financial – Do you control the business aspects of the worker’s job, such as supplying tools and equipment and determining how the worker is paid?
- Relationship type – Do you have written contracts or employee benefits such as pension plans and insurance? Will the relationship continue and is the work a key aspect of the business?
The IRS takes classification seriously because employers must withhold certain amounts from employees’ paychecks for income, social security, and Medicare taxes, but independent contractors are responsible for their own taxes. If employers do not deduct and pay taxes correctly, the IRS can impose steep fines.
The DOL uses FLSA factors as a guide in examining the working relationship. The U.S. Supreme Court has held that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA, but the total activity or situation is what defines the employee’s status. Factors which the Court has considered significant include:
- The extent to which the services rendered are an integral part of the principal’s business
- The permanency of the relationship
- The amount of the alleged contractor’s investment in facilities and equipment
- The nature and degree of control by the principal
- The alleged contractor’s opportunities for profit and loss
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor
- The degree of independent business organization and operation.
Considering these factors means:
- Employees are likely to:
- Be economically dependent on the employer
- Have set wages
- Have permanent relationships with employers
- Have hours and wages and do work controlled by the employer.
- Independent contractors usually:
- Can increase their earnings if they perform more efficiently
- Can make a significant investment in the work and bear some risk
- Are free to pick their work or set prices
- Have relationships with employers that are indefinite and changing.
Call Lusk Law business lawyers to set up an appointment to discuss any classification concern you have at (443) 535-9715.
Maryland Classifications on the Difference Between an Independent Contractor vs. an Employee
Maryland law looks at all workers as employees unless they meet a test for independent contractor status. This test uses the following three qualifications to evaluate whether an individual is an independent contractor:
- The worker is free from control and direction.
- The worker is customarily engaged in an independent business or occupation of the same nature as that involved in the work.
- The work is outside of the usual course of your business or performed outside your place of business.
In general, independent contractors are persons who are in business for themselves, and their business is usually different from the business of the person for whom the work is performed.
Maryland takes misclassification offenses seriously; on October 1, 2016, the state passed new sanctions on employers who misclassify workers. To ensure that they comply with regulations, employers should complete four key tasks:
- Properly determine independent contractors
- Understand Maryland’s penalties for misclassification
- Understand additional potential federal consequences of misclassification
- Properly file for independent contractors.
Contact Our Small Business Lawyers
Classifying workers as independent contractors or employees is complicated, especially with all the federal and state requirements business owners must meet. Maryland business law attorney Rebekah Lusk and her associates can take the burden off you by making sure your employment contracts, agreements, and paperwork are done correctly.
Contact the Maryland business law attorneys at Lusk Law, LLC to gain a long-term ally for your business. Call (443) 535-9715 today to schedule a consultation. Advocates For Life’s Obstacles and Opportunities
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