Employers should be careful when classifying a worker as either an independent contractor or an employee because this determination impacts more than just payroll tax considerations. Among other issues, worker classification can affect (1) minimum wage and overtime pay requirements; (2) employment benefits; (3) insurance considerations; and (4) liability issues.
If an employer-employee relationship exists, it makes no difference what it is called by the employer. Merely paying a worker on a 1099-basis does not transform the nature of the relationship or mean that the worker is, in fact, an independent contractor. The substance of the relationship, not the label, governs the worker’s status.
The U.S. Department of Labor currently uses the “economic reality” test to analyze the substance of the relationship and determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee). Under this test, there are two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
The nature and degree of control over the work; and
The worker’s opportunity for profit or loss is based on initiative and/or investment.
There are also three other factors that may be used in the analysis, particularly when the two core factors do not point to the same classification. These factors are:
The amount of skill required for the work.
The degree of permanence of the working relationship between the worker and the potential employer.
Whether the work is part of an integrated unit of production.
As mentioned at the start of this post, worker classification can impact insurance considerations, as it may change the coverage, a company should secure (and, painfully, its insurance premiums), including whether a company should subscribe to workers’ compensation. Misclassifying a worker may also jeopardize insurance coverage and claims. For example, a company may mistakenly purchase a policy that covers independent contractors, but this policy may not apply (and an insurance claim denied) if it is subsequently discovered that these workers were misclassified and are, in fact, employees. Worker classification also affects liability issues, as it is more common for a company to be held liable for their employee’s actions than for an independent contractor’s conduct.
The Gibson Law Group is available to help employers properly classify their workers and navigate any insurance or liability questions.