Independent Contractor or Employee?

Many employers are tempted to classify their workers as independent contractors, and not employees. Employers may look at this as a quick and easy way to save some money. After all, employers do not need to pay Social Security and Medicare taxes for independent contractors, and, for employers who have more than 100 employees, do not need to pay health insurance either.

However, while this may seem like a decent way to save some money in the short run, in the long run it may cost you. In recent years, Illinois has gotten tough on employers misclassifying employees as independent contractors. In addition to new laws like the Employee Classification Act (820 ILCS 185/1, et seq.), Attorney General Lisa Madigan and former-Governor Pat Quinn have vowed to crack down on misclassification. Misclassifying employees as independent contractors can lead to thousands of dollars in penalties and interest. Therefore, knowing what makes a worker an independent contractor or an employee is important.

An independent contractor is someone who enters into a contract with an employer to perform some specific task. For example, an independent contractor would be a plumber whom an employer calls periodically to fix problems with sinks or toilets, or a web site designer whose profession it is to do that work for a number of companies or entities. In contrast, an employee is someone who works regularly for someone else, under that person or organization’s orders in a somewhat permanent relationship.

Public employers and retired public employees have also come under greater scrutiny in recent years on this subject. In Illinois, the Department of Insurance as well as the public pension funds now closely analyze the independent contractor relationships proclaimed by their public body members. It remains common for state and local governmental entities to contract with retired public employees, who are drawing their pension, to perform services that an employee might otherwise do, or to pay an individual for services as a contractor to avoid budget issues.

The most important factor in determining whether a worker is an employee or independent contractor is the amount of control the employer has over the worker. If an employer has a lot of control over the worker, then that worker probably is an employee. For example, if the employer sets the worker’s schedule, provides him with the equipment necessary to perform his job, provides regular paychecks, and tells the worker how and when to perform a particular task, this demonstrates the type of control that make s a worker an employee. In contrast, if the employer hires the worker to perform a specific task, pays the worker when that task is completed, and does not provide the worker with the equipment necessary to perform it, the worker is probably an independent contractor.

Employment contracts, benefits, regular paychecks, reimbursement for travel expenses, and training are all signs that a worker is an employee. The ability to realize a profit or loss, work for more than one employer at a time, offer services to the general public, and flexibility with scheduling are all signs the worker is an independent contractor.

The consequence for misclassifying an employee as an independent contractor can be significant. First, the employer will owe its share of employment taxes. Secondly, if that “independent contractor” worked over 40 hours in any week, the employer will may liable under the FLSA for overtime and related damages.

 The IRS offers 20 questions to help employers determine whether the worker is an employee or independent contractor. These serve as a  useful tool in determining whether an individual is a contractor or employee.

Ultimately, we suggest contacting an experienced attorney if you have any doubts over whether an employee may be misclassified. Spending a little bit on legal advice now may save your business thousands of dollars down the road.