How to Avoid Misclassifying Employees
Mr. Supra needed all hands on deck to get his business where he needed it to be. He hired workers on a temporary basis, trained them, classified them as independent contractors, and his contractors got to work.
The work, as it turns out, was more than he had originally considered.
However, his temporary team was prepared to handle it all, and did! But the hours they logged were enormous—to match the work completed, of course.
“That’s fine,” Mr. Supra said, “Once the work is completed I’ll have the opportunity to hire a full-time team!”
Unbeknownst to Mr. Supra, those independent contractors may not have been independent contractors, according to the IRS and Department of Labor. And because they played an integral part in his business, and worked full-time hours, his business began receiving fines and issuance for back taxes owed on misclassified employees.
The above scenario is not as fictitious as you might believe—in 2015 alone, there were 8,954 filings related to wages and hours.
Not only are the fines costly, the reflection of a business as it relates to the treatment of its employees declines as a result of FLSA filings.
Read below to learn how you can avoid joining this staggering statistic.
Did you train your workers?
If, like Mr. Supra above, you implemented any training program to get your workers ready for the tasks ahead, these independent contractors are more likely employees.
Contractors are typically hired because of their expertise within an area, and thus do not require training.
What do your workers do?
An employee handbook is imperative to establish the duties performed by full-time employees and independent contractors alike.
Employers must assure that the contract reached with the contractor outlines the duties and expectations of the contractor, which must match the obligations of an independent contractor.
If, for instance, an independent contractor performs the same job as full-time workers, they are likely employees. Even in times of turnover where temporary workers are needed, they are classified as “temporary workers,” not “independent contractors.”
Hiring professionals to draft and regularly review your employee handbook protects the organization from litigation or governmental audits.
How do your workers perform the work?
While there are many factors that determine the degree of employment, consider the following when determining worker classification:
- Is there a sequence in which the work must be completed?
- Do your workers work at an agreed upon location?
- Is the work performed a key aspect of your business?
- Do your workers receive vacation time or benefits?
- Do your workers use their own laptop computer or a computer within the office?
Organizations that answered “yes” to two of these questions (or more) should reconsider the classification of eligible employees.
Are your contractors working with other organizations?
Independent contractors are allowed to work with organizations as they please. If you have set expectations for an independent contractor to work solely for your business, they are considered an employee.
When should I reclassify an employee?
When you suspect an independent contractor should be reclassified to an employee, it is best to consult a professional or attorney. Conducting an unbiased investigation into the classification issue can deter unwanted visits from governmental officials and the raising of questions surrounding the internal investigation.
Note that each state has different regulations in relation to the relationship between employer and contractor, and employer and employee.
For an overview of what to analyze and consider when determining employee classification, visit the IRS.gov page for more information.
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