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Risk Management: General


Employee or Independent Contractor?

Every employer needs an answer to this question, “Is this worker an employee or independent contractor”?  Getting it wrong can subject you to very large fines and penalties that could literally put you out of business.  Misclassification of workers is the subject of crackdowns by three major agencies - The Internal Revenue Service, Department of Labor and Workers Compensation Industrial Commissions.  

Here’s why…

THE MISCLASSIFICATION OF WORKERS:  Employers are either uninformed of the rules or tempted to misclassify workers as independent contractors because they not only avoid the expense of preparing and reporting payroll and withholdings but also avoid matching FICA, FUTA, state disability taxes, unemployment insurance, workers compensation, overtime, health insurance, pension and profit-sharing benefits. Violating the legal requirements of these various statutory programs triggers a complicated and very expensive unwinding process back several years.  Paying back contributions, paying fines, refiling tax returns, etc. is more time and money than you can imagine.  

WHAT IS AN INDEPENDENT CONTRACTOR:  According to the IRS, “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” 

WHAT IS AN EMPLOYEE: According to the IRS, ”under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done.  This is true even when you give the employee freedom of action.  What matters is that you have the right to control the details of how the services are performed.”

The IRS provides guidance to properly classify a worker under three category tests – Behavioral Control, Financial Control and Relationship of the parties. The Department of Labor and Workers Compensation use similar but not identical tests.  

A common sense test would be this: If they don’t advertise their business of doing this specialized work for anyone who calls them (ie: plumber, painter, electrician), then they probably aren’t an Independent Contractor.  A seasonal or day worker is NOT an independent contractor even if they work for you and someone else at the same time. They are an employee. When in doubt, get HR or legal advice.  Getting it wrong is just too big of a risk.   

Here at American Insurance, we routinely get this question in regards to how Workers Compensation and General Liability rates are charged and calculated. You are invited to contact your Agent online or call us at (208) 746-9646 or text us at (208) 518-0823 or email us at info [at] am-ins [dot] com to request the white paper “Hiring and Managing Independent Contractors” free for our clients. 

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The content of FAQ articles are general in nature and are not intended as a substitute for professional legal, financial, or insurance counsel for individuals. Insurance coverage forms vary by issuing company and by state. For specific advice contact us.