9 Keys to Classifying Independent Contractors
One of the questions I get asked frequently by small business owners is if they have classified their Independent Contractors (IC’s) correctly. The answer is it depends; the Internal Revenue Service, Department of Labor and state agencies regulate independent contractors. The structure of the relationship and organizations control over the Independent Contractors finances and behavior is key to whether they are independent contractors. Below are 9 key areas to review when determining if you have your Independent Contractors correctly classified.
- Hiring only experts in their field. Independent Contractors know how to do the job. You are not training them to do the job that you hired them to do. It is expected that IC’s keep their skills current through training and professional development on their own time and at their own expense.
- Equipment. IC’s use their own equipment to complete the job at hand. This may be their own tools in construction, computer and software in business or lawn equipment when they are keeping your property tidy.
- Assignments. Independent Contractors choose their own jobs. They are promising you a result and paid for that result. This is one of the biggest differentiators. For example, a driver as an IC will be paid $X for every ride that they give. They choose their own jobs, hours and location. Their ability to generate income is based on the results they produce, rides, and consumer demand based on when they choose to work. Assignments can happen in a variety of ways. In this example, the IC may be using an app like Uber or Lyft. The key to each of these is that the IC picks the assignment.
- Daily Routine. When working with an IC, they will choose when and where they work. Requiring them to work specific hours or at a specific location puts you at risk of misclassifying the individual.
- Compensation. Paying an individual for their results shifts them into an IC role. This may be monthly, at specific project milestones or each time a project is completed and invoice received. The IC takes on the financial risks of the business expenses, including clerical, software, equipment and travel needed to complete the job. In addition, they risk not being paid if the results are not produced as the contract specifies.
- Independence. IC’s are running a stand-alone business. The means that they carry their own worker’s compensation insurance have an Employee Identification Number (EIN) and market their services to the general public. They can be working for several organizations at the same time and have the ability to hire others to complete the contracted work for your business.
- Relationship. IC’s are meant to complete a short-term need, typically less than 6 months that is based on results. Requiring IC’s to provide updates or reports on their actions may shift this relationship to that of an employee.
- Primary Function. If the IC performs work that is necessary to the primary function of the business and 51% or more of your workforce are independent contractors, you are at risk of misclassification.
- Ending the relationship. An IC earns their income based on the contracts they enter into. The relationship is ended when the contract is complete. Firing an IC or an IC quitting creates the risk of a breach of contract lawsuit.
If you are seeking additional insights into the classification of your independent contractors, please reach out of an Independent Contractor Audit. Please note that this is not legal advice and you should contact your attorney with any specific questions.
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