Classifying Workers Correctly
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Q: What are the laws for working as a subcontractor or an independent contractor? Specifically, are they treated differently than employees?
A: Independent contractors are different from employees in many respects, and depending on their status, they will be treated quite differently under the law. To determine whether an individual is an employee or an independent contractor, employers must conduct a fact-specific inquiry regarding the particular job duties of that individual. In conducting this inquiry, employers will use different tests under various employment statutes to help make their determination.
Generally, these tests consider how much control an employer has over the worker (often referred to as the "right to control") and whether the worker is dependent on the business of the employer for his livelihood. In applying these different tests, many factors will be considered, including whether the worker is trained by the employer, who furnishes necessary equipment, whether the services are rendered personally, how the worker is paid (by the hour as opposed to by the job), the duration of the employment, and how the employer can terminate the relationship.
If a person is determined to be an independent contractor, this will affect the application of various employment statutes and tax laws, including state unemployment taxes, workers' compensation, federal and state income tax withholding (including Social Security and Medicare taxes and federal unemployment taxes) as well as wage and hour laws.
For instance, independent contractors are not protected against discrimination under Title VII of the Civil Rights Act, the Americans with Disabilities Act or the Age Discrimination in Employment Act, as these statutes only apply to an employer-employee relationship. In addition, independent contractors are not covered by the Fair Labor Standards Act (FLSA), which governs minimum wage and overtime pay for workers.
With respect to workers' compensation, which is designed to protect workers who are injured on the job, each state's law is different. Some states require all workers to be covered under its workers' compensation programs, regardless of whether or not they are employees or independent contractors, while other states only require employees to be covered. It is noteworthy that if an independent contractor is injured on the job in a state where he is not covered by workers' compensation, he would not be limited in the type of civil action he could file against the employer arising out of that injury. In states where independent contractors are covered by workers' compensation laws, the contractor is limited to the remedies provided under those laws.
Employers need to be particularly cautious not to incorrectly classify a worker as an independent contractor, as the liability for doing so can be significant. Specifically, employers can be held liable for all income taxes not properly withheld, along with overtime wages and unemployment taxes and contributions to Social Security, among other things.
In sum, employers need to be aware of the status of each of their workers for purposes of how they are to be treated under particular employment and tax laws, as workers are entitled to different protections (and employers have different obligations) depending on whether the particular worker is an independent contractor or an employee.
Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.
Larry Rosenfeld is co-chair of the national labor and employment practice of the law firm Greenberg Traurig LLP. A frequent writer and lecturer on employment law topics, Rosenfeld is experienced in the areas of federal laws pertaining to employment issues, EEOC, ADA, termination matters, employment liability and the Fair Labor Standards Act.