By: Attorney Shira Truitt
Hiring a person to work with you is a great idea that allows you to expand and grow. Determining what's best can be tricky, especially if you are considering hiring and independent contractor. There's a risk that hiring an independent contractor who, you later find, was misclassified and was actually an employee could open your business to unnecessary risk. Misclassification of employees is the practice of incorrectly categorizing workers as independent contractors rather than employees. This can have significant consequences for both the business and the worker.
There are several reasons why businesses may misclassify employees as independent contractors. Some businesses do it to avoid paying taxes and benefits, such as unemployment insurance and workers' compensation. Misclassification of employees can have serious consequences for both the business and the worker. For the business, misclassification can result in legal and financial penalties, such as fines and back taxes. It can also damage the business's reputation and lead to negative employee morale. For the worker, misclassification can result in lost benefits and protections, such as health insurance and retirement plans. It can also result in lower pay, as independent contractors are often paid on a project-by-project basis rather than a regular salary or hourly wage.
It is important for businesses to accurately classify their workers as either employees or independent contractors, in order to avoid misclassification and its associated risks. Independent contractors and employees are two different classifications of workers, with different rights and obligations. Understanding the difference between independent contractors and employees is important for businesses, as it can affect how they are taxed, how they are compensated, and what benefits and protections to which they are entitled.
Here are some key differences between independent contractors and employees:
Control over work: Employees are generally subject to the direction and control of their employer, whereas independent contractors are more autonomous and have more control over their work.
Relationship with the business: Employees have a long-term, ongoing relationship with the business, whereas independent contractors typically have a more transactional relationship.
Compensation: Employees are typically paid a salary or hourly wage, whereas independent contractors are typically paid on a project-by-project basis.
Taxes: Employees have taxes withheld from their paychecks, whereas independent contractors are responsible for paying their own taxes.
Benefits: Employees are generally entitled to benefits such as health insurance, vacation time, and retirement plans, whereas independent contractors are not.
It is important for businesses to accurately classify their workers as either employees or independent contractors, as misclassification can have legal and financial consequences. Before you contract with Mr. Independent, make sure he's not or does not become an employee.
Misclassification of Employees as Independent Contractors. (n.d.). U.S. Department of Labor. Retrieved from https://www.dol.gov/agencies/whd/misclassification
The Consequences of Misclassifying Employees as Independent Contractors. (n.d.). The Balance Small Business. Retrieved from https://www.thebalancesmb.com/the-consequences-of-misclassifying-employees-as-independent-contractors-2948561
Misclassification of Workers as Independent Contractors. (n.d.). IRS. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/misclassification-of-workers-as-independent-contractors
Employee vs. Independent Contractor: How to Determine the Difference. (n.d.). The Balance Small Business. Retrieved from https://www.thebalancesmb.com/employee-vs-independent-contractor-how-to-determine-the-difference-2948561
Employee or Independent Contractor: How to Tell the Difference. (n.d.). IRS. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/employee-or-independent-contractor-how-to-tell-the-difference
Independent Contractor vs. Employee: What's the Difference? (n.d.). Society for Human Resource Management. Retrieved from https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/independentcontractorvsemployee.aspx
If you need legal advice or a lawyer in Illinois or Missouri, please contact The Truitt Law Firm, LLC for assistance. For more information on The Truitt Law Firm, LLC or to schedule an appointment, please go to www.thetruittlawfirm.com.