According to the Fair Labor Standards Act (FLSA), an employee is any individual doing work for an employer. The definition is seemingly simple to distinguish an employee from an independent contractor; in practice, however, the line between the two is anything but clear cut. There’s no hard and fast rule that makes the determination – and to complicate things, there are significant penalties for misclassification. Still, there are several factors that can help you make the determination so you can make proper withholdings, avoid problems with the Department of Labor enforcement and treat the worker appropriately in the work environment.
Employee vs. Independent Contractor: Guidelines
In deciding FLSA cases involving these two types of workers , the US Supreme Court has established some guidelines as to what qualifies as an employee or independent contractor. No single one of these rules makes the determination; rather, they’re all to be considered in connection with each other. Companies must look at:
- Whether the worker’s services are a vital part of the employer’s business. An employee would have an integral role, while someone performing supplementary tasks would be an independent contractor.
- The permanency of the business relationship. Someone who has been working for longer would probably be considered an employee.
- Whether the worker has invested in the facility or equipment. An individual who uses their own equipment to do the job or works from his or her own facility is more likely to be seen as an independent contractor.
- How much control the principal maintains over the worker. If a company’s managers supervise the worker and set the work schedule, this is usually an indication of an employer-employee relationship.
- The worker’s investment in the job. For instance, someone who maintains their own insurance and bonding would be an independent contractor.
- The level of skill required as measured against other workers competing for the job. Here, you’re looking at what amount of judgment and initiative is required to complete the work. A worker conducting tasks that require little training might be considered an independent contractor if other signs point to that classification.
Penalties for Employee/Independent Contractor Misclassification
If you treat an employee as an independent contractor in violation of the above rules, you may be responsible for paying approximately 41% of the worker’s pay for up to three years. This amount represents the taxes on Social Security, income and unemployment insurance that you didn’t withhold because you misclassified the employee as an independent contractor. In addition, if the IRS finds that you’ve deliberately misclassified an employee as an independent contractor, you may be subject to criminal penalties.
Not one of these rules should be considered controlling, as they’re meant to be viewed as a whole when determining whether a worker is an independent contractor or employee. Paypro’s workforce management solutions can help you to track your employees’ time as well as assist with other pertinent compliance tasks to ensure there are no doubts about the status of the people you retain for work. Please contact us to consult with a specialist about our easy to use, web based workforce management platform.