Four Things You Need to Know About Worker Classification
I cringe every time that I read an article in an entrepreneur magazine that encourages readers to use independent contractors, instead of hiring employees, to build their new businesses. It’s not that independent contractors are a bad idea, but encouraging their use without elaborating on the very detailed criteria for proper classifying a worker as one gets far too many small business owners in deep financial trouble with the states in which they operate. The money they think they saved on salaries and benefits get paid instead to the respective Department of Labor, Department of Taxation and Finance, or the Workers Compensation Board in terms of penalties and interest that often far exceed the cost of an employee. I make a decent living from defending employers who took legal advice from their accountants and non-lawyer friends, and although it is fulfilling to mitigate the damages and get businesses back on solid foundations, it is heartbreaking when one has to close because of mistakes that could have been avoided.
In an effort to keep you from ending up in an attorney’s office, defending a penalty assessment or other worker misclassification proceeding, here are four key points you need to remember when hiring someone to do work for your business. (The criteria is slightly different when you are hiring people to do casual work on or in your home. That will be addressed in a separate post.)
- IT IS NOT THE NUMBER OF DAYS WORKED THAT MAKES A WORKER INDEPENDENT. You can hire someone who has a full-time job somewhere else for casual work in your business, and that person can still be deemed your employee, too. It’s based on the type of work he does. Did you hire your friend (not his business) to help you move some office furniture into your new space? Or did he help you with registration at your one-day event? He could be your employee.
- IT IS NOT THE NUMBER OF HOURS WORKED THAT MATTERS. You can have a bookkeeper who only works for you three hours per week (or month) be deemed your employee in New York. Likewise, that day laborer whose full name you don’t know probably became your employee when you hired him to help paint your customer’s interior trim for a few hours on the day you were short-handed.
- THE TYPE OF WORK YOU AND THE WORKER DO MATTERS–A LOT. If you’re a web design company and you hire “freelance” web designers, they are probably your employees. If you hire virtual assistants (“VA”) do basic administrative tasks, they are likely your employees, too.
- THERE ARE EXCEPTIONS. If the friend you hired owns a business that provides the same services to others as those he provided to you, he is probably your vendor, not your employee. If the web designer you hired has an established design firm with many other clients like you, she might be a true independent contractor. If your VAs are employees of a service you hired, the employment relationship will likely remain with the service.
You will notice that I used terms such as “probably”, “likely”, and “might”. This was intentional, as the status of every allegedly independent worker is considered in light of the unique circumstances of the work and the relationship. You cannot rely on your Independent Contractor Agreement where it might conflict with the laws of the state(s) in which each worker provides services. You cannot assume that the service you hired is assigning you one of its employees. You have to do your own due diligence.