Contract workers have always been an essential part of certain industries. More and more, however, all types of companies are incorporating contract workers into their business operations, to varying degrees and in a multitude of capacities. Sometimes these are remote workers who complete and submit work online, and other times they fill temporary positions on a job site or in an office environment.
Regardless of the nature of your business, it’s essential that you clearly understand whether the person you’re hiring will qualify as a contractor or an employee. The IRS provides resources you can use to evaluate the situation, and if you’re still unsure, you can file a form SS-8, which the IRS will review in order to make a determination.
Guidelines for Classification
There are several areas to look at when you’re classifying a worker as a contractor or as an employee. These mostly have to do with the amount of control the worker has over the various aspects of their job and their relationship to your company. They include :
- Training and Instructions – This involves the amount of control your company has over the way the worker completes tasks. A contractor is more likely to be responsible for providing a finished product by whatever means they choose, taking advantage of their own expertise in the field. An employee is more likely to be trained by your company to follow certain policies and procedures you have outlined.
- Financial Responsibilities – This relates to the way payment and reimbursement for expenses is handled. A contractor is more likely to include expected expenses in their fee, as well as to have input in determining when and by what method they’re paid. An employee is more likely to have their work-related expenses reimbursed by the company, and to be paid through a payroll check or in whatever manner is customary for other employees.
- Time Management – Another factor used in determining the status of a worker is the amount of control they have over how they use their own time. If you expect a worker to be available during a specific time on specific days, whether remotely or in your place of business, they’re more likely to be an employee. A contractor, on the other hand, may have a deadline, but is free to do the work whenever suits their schedule as long as it’s delivered in a timely fashion.
- Benefits and Contracts – Employees are typically offered benefits like health insurance, vacation pay, pension plans, and more. Contractors, on the other hand, simply receive compensation for the work they produce.
- Relationship Duration – The expected length and nature of the business relationship between your company and the worker is another element to consider. A long-term relationship that involves the worker performing duties that are vital to the functioning of the business would tend to push them towards the employee category. Contractors typically perform functions that are needed for only a set period of time, which may be weeks or even months.
While none of these factors alone determines whether a worker is a contractor or an employee, evaluating each can help you ensure everyone in your company is classified correctly. This classification dictates your responsibilities in terms of the withholding of employment and income taxes, and it has broader insurance-related implications as well.
Worker’s Compensation and Liability Implications
One way the proper classification of your workers impacts your company relates to your liability in the event that worker makes an error that causes harm to a third party. If that person is an independent contractor, they are liable for their actions, and so for any damages incurred. If they are an employee, however, the company may be liable, and so you need to make sure you have proper insurance in place to protect your business.
On the other hand, contractors are often treated as employees for the purposes of resolving worker’s compensation claims, although this varies a bit from state to state. The only way to avoid this responsibility is to ensure you only hire contractors who have their own worker’s compensation policies. If they don’t, you need to make sure your policy will cover them if a claim does arise.
If you’d like to learn more about the range of business insurance policies we offer and what we can do to help your company succeed, contact our offices today.
