Hi, my name is attorney Robert Vaksman, and today I’m going to discuss employees versus independent contractors.
As business attorneys, we get asked this question a lot. The question is, “Can I classify my employee or my new hire, can I classify them as an independent contractor?” By the way, we get asked this question both by companies and individuals because both the company and the individual, the new hire, in many cases, wants to be classified as an independent contractor. Well, why would they want to do that? Primarily, this is usually going to be due to taxes from the employee employer side where usually the employer needs to pay additional taxes for the employee. That would be payroll taxes, potentially additional insurance, workers compensation, maybe some additional business insurance that might be required.
If they’re an independent contractor, the payroll taxes by the company don’t have to be paid. The company may not have to be concerned about workers compensation, and I say may because that’s also an open question. Whereas from the personnel side, the staff member would potentially want to be classified as an independent contractor as well because what they can do on their side, hopefully, they’re actually set up as an entity, as a separate business. Even if they’re not and even if they’re operating as a sole proprietor, if they can then consider themselves to be a business, again, whether they’re a sole proprietor or a separate entity, and in doing so they can take business deductions. So, imagine the contractor has to use a computer at home, well, that computer can now be considered a business deduction for the independent contractor.
Similarly, if they are working at home, they might have a deduction for Internet expenses that they would not otherwise have. What’s also important to understand is that misclassification of status as a contractor versus an employee can potentially have really negative side effects. You need to be very careful. And when I say you, I mean both companies and the contractor need to be very careful because different state or federal agencies might have significant penalties attached to a misclassification.
Here’s the other important thing here to understand is that every state or federal agency is going to have actually a different test for determining who is an employee versus a contractor. Not only that, it’s a state by state analysis. Just as a brief example, in California, most state agencies are going to favor a employee status. In other words, there’s going to usually be a presumption that the individual is an employee instead of a contractor whereas, for example, in Nevada, there is a presumption that the individual is a contractor. That’s usually what you start with.
The tests that these state or federal agencies have, and might as well give you a few examples, the state agencies could be the Employment Development Department, the Department of Labor Standards, the Internal Revenue Service, the Franchise Tax Board, any of these agencies are going to be looking at these issues because it might implicate them. They’re all going to have different tests. The tests might involve things like control; does the employer have control over the employee or the contractor?
That’s a really important one. And if you think about it, it’s logical. If the employer has the ability to tell the contractor or rather the, let’s call it the staff person, what to do, that would tend to tip the scales in favor of the person being an employee because if the employer is saying, “You have to be there at this time. You have to use my tools. You have to do these things the way I want them to be done. I have a handbook and you need to follow the handbook.”
Well, all of those things tip the scales in favor of the individual being a employee. Whereas a contractor is someone that potentially works remotely, potentially is entirely task-driven. So instead of having to be somewhere 8:00 to 5:00, a contractor is simply given a set of goals and tasks, and the employer says, “I need these five things accomplished. I need 10 Facebook posts a week. I need you to go get two clients.” Whatever the case may be, it’s going to be very fact-intensive. It’s difficult when we do get phone calls from a employer or a staff person, unless we really dig in to the specific details, it’s somewhat difficult for us to give a clear answer.
However, it is clear and this is why the state and federal agencies are constantly trying to figure out and trying to see if there was a misclassification, it is clear that most of the time the both sides are going to want to be considered or consider the staff person a contractor. In some cases, potentially, in the case of Uber, you may have heard where Uber is in a really long standing litigation right now with the state of California because it classifies all of its workers as contractors. It has huge repercussions if they end up being employees, because as employees, they have all kinds of additional workers rights that contractors don’t have.
For example, in California, overtime attaches to any staff person when they work more than eight hours a day or 40 hours a week. Not so for contractors. There is no such, any kind of a similar rule for contractors, contractors can go work however they long they want to work because for contractors, they’re technically their own business, right? That’s how Uber wants to consider all of its drivers as it’s their own business.
Another one aside from overtime wages to think about is that, for example, again in the case of Uber, if the drivers were to be considered employees, they then would be owed reimbursement for any gas, reimbursement for any insurance because employees are owed reimbursement for any costs related to the work. Not so for contractors, contractors, again because they’re their own business, have their own expenses. I talked about earlier the contractor who’s working on their own laptop and that’s their own expense.
So the consideration of employee versus contractor is wrought with so many twists and turns, and has so many different implications. One thing I can tell you is that you should absolutely speak to an attorney with regard to this analysis because it’s very fact-specific, very case by case, very state by state, and not doing it correctly can cost you. It can cost you later down the line, at the beginning right now, if you misclassify someone, no one might be looking but eventually, if there’s a potential audit and why would an audit occur?
Well, an audit might occur because you won the audit lottery, unfortunately. It might occur because the individual, might later on, that you were working with, whom you classified as a contractor, they may go file a wage claim against you. Once you terminate them, they may say, “You know what,” they may go to the state, to the Employment Department and say, “I should have been an employee this entire time.”
If the state agrees with that staff person, you’re going to have significant penalties that you’re going to have to pay. So be very careful, speak to an attorney and certainly consider all your options before just going down the road of classifying someone as a contractor. As appealing as it may be, it’s very wrought with concern, you really need to be concerned. You really need to think about this really carefully. Have a great day and stay tuned for more videos.