Independent Contractor? Are You Sure?

5From Elarbee Thompson–  Multi-state businesses “face unique challenges when attempting to classify individuals correctly as non-employees: whether an individual is an employee or a contractor will depend upon not only the state, but also under differing laws within the state. For example, in one state alone, whether an individual is properly classified as a contractor, and thus not entitled to benefits such as group health insurance, might be determined under a “common law” test, while whether that same individual is entitled to overtime compensation as an employee, might be determined under a “economic realities” test. A third statutory test may apply to whether, in turn, that same individual is entitled to unemployment compensation. Thus, in a single state, whether an individual is properly classified as a contractor can have three different results. On top of that, the U.S. Internal Revenue Service (IRS) has its own, twenty-factor test to determine whether federal employment taxes are owed on payments to that same individual.

As a practical result, this means that for each state in which the services of individuals are engaged, you need to separately analyze whether that individual can be properly classified as a contractor. While this may mean that similarly-engaged individuals may be “employees” in one state and a “contractor” in another, the difficulties are potentially outweighed by the consequences of misclassification of an individual as a contractor: back wages for unpaid minimum wage and overtime compensation, damages for benefits that were not provided, back taxes for unemployment benefits, and fines and penalties for breaks that were not provided, failure to provide workers’ compensation insurance, and so forth…..”

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