There are a number of reasons which make worker classification an important concern for businesses. To properly take care of the subjects like employment laws, taxes and employment benefits, it’s important that those working for you are categorized in the proper manner. New trends are emerging in the economy along with the growing demand for freelance contractors. These days, several businesses prefer hiring independent contractors for performing jobs that were previously performed by full-time employees. A recent survey suggests that in the United States, one in three workers is considered an independent worker. Being a business owner, it’s important for you to determine whether a worker is a full-time employee or an independent contractor with the help of the classification criteria provided by the state and federal regulatory bodies. Understanding the classification also helps you make better staffing decision by understanding whether you should hire a full time employee or an independent contractor. Not classifying your workers correctly can cost your organization dearly.
Your employees are to be classified in the following manner:
- The employer pays them on a regular basis (hourly, weekly or monthly)
- Their relationship with the employer is indefinite
- Employer have a control on what and how they work on
- They form an integral part of the day-to-day operations of the business
- They are eligible for employee benefits like vacation pay, pension plans etc.
- They are also eligible to receive trainings provided by the organization
You can classify independent contractors on the basis of the following criteria:
- They have a temporary relationship with the employer
- They perform their work using their own materials
- An employer cannot terminate their services without liability
- They are paid a flat fee and are provided complete invoices for a job
- They are not eligible for worker’s compensation or unemployment benefits
Businesses that hire independent contractors reduce their amount of state and federal taxes. Thus, state and federal agencies perform audits to ensure that the organizations are maintaining compliance with the laws and regulations that govern worker classification. Violating the law can lead you to significant penalties, in addition to the obligation of paying back wages and taxes for the misclassified workers. Businesses are highly recommended to hire good legal counsel to make sure that they are classifying the workers properly.
Hiring a full time employee costs an organization 25-30% more than the cost of hiring an independent contractor. However, government studies have shown that about 25-30% of employees are misclassified as independent contractors. The Internal Revenue Service explains that for employees, a company needs to withhold and pay unemployment taxes, income taxes etc. on their wages but for independent contractors the employer generally doesn’t have to withhold or pay any taxes. Also, full time employees are entitled to health benefits but independent contractors are not.
There are a number of employment laws which cover only employees and wrong classification of workers as non-employees leads to violation of these laws. If the government agencies find out that there has been misclassification of workers on your part, you may face hefty penalties. Apart from maintaining compliance with regulations, there is another important reason for which proper classification of workers is crucial. Employers may face civil lawsuits for wrongly classifying workers. Independent contractors can file a lawsuit against a previous employer if they feel that they have been misclassified and denied the benefits and compensations.