It is generally beneficial for an employer to classify a worker as an independent contractor rather than an employee. An independent contractor is someone an employer hires sporadically to perform a particular task, while an employee is someone who regularly works for the employer and performs a wider variety of tasks under closer supervision of the employer. Classifying a worker as an independent contractor instead of an employee allows the employer to avoid paying payroll taxes (which are 7.65% of the employee’s wages), unemployment insurance, worker’s compensation insurance, and in many cases providing health care.
However, misclassification of an employee as an independent contractor carries hefty punishment. Doing so mistakenly, can lead to back taxes and fines up to 40% of the worker’s wages and doing so intentionally could lead to jail time. Therefore, employers should be sure that they are properly classifying their workers.
A recent case from the Seventh Circuit Court of Appeals, which covers Illinois, Indiana, and Wisconsin, listed the following factors as those the court will use to determine whether a worker is an independent contractor or an employee:
(1) the extent of the employer’s control and supervision over the worker, including directions on scheduling and performance of work; (2) the kind of occupation and nature of skill required, including whether skills are obtained in the workplace; (3) responsibility for the costs of operation, such as equipment, supplies, fees, licenses, workplace, and maintenance of operations; (4) method and form of payment and benefits; and (5) length of job commitment and/or expectations.
The more control and supervision the employer has over the worker, the more likely the worker will be classified as an employee. If the employer is telling the worker to be at a certain location at a certain time, is training the worker and providing the equipment required to perform the job, and the job lasts indefinitely as opposed to a finite period of time, the worker is probably an employee and not an independent contractor.
In its opinion, the Seventh Circuit emphasized the importance of the first factor, stating the extent of the employer’s control over the worker is what largely determines whether a worker is an employee or independent contractor.
If you have questions about whether a worker is an employee or an independent contractor, feel free to contact me. Getting this right will help you avoid lawsuits, fines, and other penalties.