According to this Slate article, approximately 34 percent of the U.S. workforce is made up of freelancers and independent contractors. This is largely due to the rise of tech-centric on-demand companies keeping their costs at a minimum by largely employing only independent contractors. However, while there are many advantages to maintaining a freelancer only staff, incorrectly classifying part or full-time employees as independent contractors can have serious consequences. In addition to facing significant fines from the U.S. government, you could also be leaving your business open to devastating civil liability. Here is the checklist that will help you determine whether or not you should classify a worker as an independent contractor or an employee.
Take the initiative
To aid employers in making appropriate worker classifications, The U.S. Department of Labor created a six part test designed to separate independent contractors from employees. While the language used in some parts of the test is a bit broad, the test is really designed to evaluate an employer’s relationship to an employee. For example, one way to tell the difference between an employee and a freelancer is that an employee is specifically directed on the particulars of how to complete a task, whereas a freelancer is allowed to use their own judgment when completing tasks. As this Insurance Journal post makes clear, the ability to operate independent of direct oversight is a key difference between freelancers and employees.
The importance of benefits
While this may seem a bit obvious, the question of whether or not a worker receives benefits plays a big role in drawing distinctions between freelancers and employees. Freelancers are not entitled to receive paid time off or health benefits from an employer, no exceptions. Additionally, independent contractors must carry their own workers compensation insurance. While not having to cover those costs holds obvious appeal, as this Nolo piece points out, employers cannot give an independent contractor ongoing instruction or specific work hours. You are also prohibited from demanding that a contractor attend an employee meeting or that they provide you with a formal report on their work.
Who’s in financial control?
Lastly, the U.S. government is very clear that if you reimburse worker’s travel costs or equipment and material expenses, that person is an employee, not a freelancer. In a situation where you cover an employee’s expenses, you are exerting a measure of financial control over that person. So, if you own a construction company, follow the advice laid out in this ERE Media article and make sure that your independent contractors bring their own tools to the job. If you are still unclear on the distinctions between employees and independent contractors, it’s a good idea to employ the services of an experienced labor attorney. They’ll be able to help you make classification decisions that are in accordance with federal and state law.
This article was written by Mario McKellop of Examiner.com for CBS Small Business Pulse.