Employee or Independent Contractor?

So I see here that Pennsylvania just passed a law making it a crime to misclassify an employee as an independent contractor.

A criminal offense? Wow.

Why resort to such a severe penalty? Well, it turns out that that a few unscrupulous employers are purposefully mixing the two up. They do so of course because it is far less expensive for an employer to hire an independent contractor versus an employee. With an employee, the employer has to pay FICA taxes, unemployment insurance, benefits, days off, etc. None of this is true with an independent contractor.

Conversely, in the last few years there has also been a rash of lawsuits by independent contractors claiming they are really employees, even though in many cases it turns out they are not. Seeking to get alleged back pay and benefits, these folks create nightmare legal scenarios for the corporate defendant.

So, between unprincipled employers, and dishonest independent contracts, the rest of us are stuck in the middle. It behooves the smart small business then to understand the difference.

The easiest way to think about it is by analyzing the name independent contractor. Independent contractors (ICs) are just that, independent. They decide when, where, and how they will work. They set their pay. They may decide to work for many people, not just one.

More specifically, courts look at many factors when making this determination:

  • Whether the person receives a regular, steady paycheck (ICs do not, typically)

 

  • Whether the person supplies his or her own materials, equipment, and tools

 

  • If the person sets their own schedule (ICs do)

 

  • If the person can choose not to come to work without repercussion (Yes)

 

  • Whether the work is permanent or temporary (ICs are typically temporary)

Another interesting, and significant, factor that courts look at is called the “economic realities” test. If someone has only one source of income – say it’s Company X – then no matter what they call themselves, or how the business classifies them, the economic reality is that they are likely an employee of Company X. Of course this is only one factor, but it is an important one.

So what does this mean for you?

There is no problem in hiring an independent contractor, just so long as they are really independent. Make sure you have policies and contracts in place that take into account the factors above, and have both parties sign these documents before the work engagement begins. Then, treat them like they really are independent.

The worst case scenario is just that. But if it ever does come along, you will be happy you have these documents in place.

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