Classifying Your Workers Correctly: Heads Employee, Tails Independent Contractor?

Posted on: July 2nd, 2016

There has been much discussion recently in The Washington Post, The Wall Street Journal, and The Fresno Bee about classifying individual workers as employees versus independent contractors. For a small business owner, it takes more than a flip of a coin to determine which is correct. While there are certainly some advantages for business owners to have independent contractors instead of employees, misclassifying a worker as an independent contractor can have severe legal consequences including payment of fines, penalties, and unpaid taxes. Additionally, the small business owner or “responsible person” can be held personally liable for these payments.

Often small business owners believe that because they have an independent contractor agreement the worker is automatically an independent contractor. However, the IRS and the State of California have held that having a written contract is not, by itself, a determining factor. While there is no single test for determining whether an individual is an independent contractor or an employee, the following guidelines should be taken into consideration:

• Whether or not the principal has the right to control and direct the worker
• The extent to which the services rendered are part of the principal’s business
• The permanency of the relationship (isolated event or continuous in nature)
• Whether or not the person providing the services supplies the tools and equipment to do the work
• Whether or not the worker has opportunities for profit and loss
• Whether or not the parties believe they are creating the relationship of employer and employee
• Whether the method of payment is by piece rate, time or by the job
• Whether the person performing the services has the right to hire and terminate others

While the task of classifying workers may seem overwhelming, the State of California and the IRS provide assistance in issuing determinations for worker status (CA Form DE-1780 and IRS Form SS-8). In short, classifying workers should not be left to chance (or ignorance).