20 Ways to Define Your Company’s Workforce
Do you think that just because you pay someone using a W-9 that they are an independent contractor? Think again.
How the law classifies a worker relies on much more than a W-9. For example, the IRS employs a 20-factor test to determine whether a worker is an employee. Under copyright law, only certain situations meet the criteria for a worker to be an employee. Florida’s Workers’ Compensation Law says that an employee is any person who is paid for the performance of any work – even most W-9 contractors. And some courts have held employers liable for the negligence of independent contractors.
So how do you know whether you have employees or independent contractors? The IRS test is a good place to start:
1. Is the worker required to follow your instructions about when, where, and how he or she is to work? If so, the individual is ordinarily an employee.
2. Do you provide training to the worker or require an experienced employee to mentor him or her? Providing training indicates that someone is an employee rather than an independent contractor.
3. Are the worker’s services integrated into your business operations? Generally, this shows that he or she is subject to your direction and control, and is therefore more likely to be regarded as an employee.
4. If the worker’s services must be rendered by the individual personally, it is more likely that he or she is an employee.
5. Do you hire, supervise, and pay assistants for the worker? The more of this kind of control you exercise over their working environment, the more likely it is that the individual is your employee.
6. Is there a continuing or frequently occurring relationship between you and the worker? If so, this indicates employment.
7. If you set hours of work for your worker, it indicates that you control the work environment, and therefore indicates employment.
8. If the worker must devote substantially full-time hours to your business such that he or she can’t take outside work, it is most likely employment.
9. If you require the worker to work at your business’ premises, but the work could be done elsewhere, it is most likely employment.
10. If a worker must perform services in the order or sequence you set, or even if you just retain the right to tell the person how to do the job, it is more likely employment.
11. If you require the worker to submit regular reports, you exercise enough control for him or her to be an employee.
12. Paying by the hour, week, or month generally points to a worker being your employee. Paying by the job or on commission indicates an independent contractor.
13. If you pay the worker’s business and travel expenses, the worker tends to be an employee.
14. If you furnish significant tools, materials or equipment for the worker, the worker tends to be an employee.
15. If the worker invests in facilities to be used in providing services to you, he or she is likely an independent contractor.
16. A worker who can realize a profit or suffer a loss as a result of services is generally an independent contractor.
17. If a worker performs services for multiple unrelated clients at the same time, that indicates he or she is an independent contractor.
18. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor.
19. Your right to discharge a worker indicates employment. An independent contractor cannot be fired so long as he or she produce a result that meets contract specifications
20. If the worker has the right to end the relationship with you at any time without incurring liability, he or she is most likely an employee.
Almost all of the tests the IRS employs have to do with the amount of control you exert over the worker. When your intent is to hire an independent contractor, your best bet is to enter into a written agreement that spells out the terms of your business relationship. Your agreement should address all of the above factors as well as any other concerns, such as the ownership of any resulting intellectual property.
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About the Author
Suzanne D. Meehle is the owner of The Meehle Law Firm, a boutique firm exclusively serving small businesses in the areas of entity formation, contracts, employment issues, business transactions, intellectual property and business litigation.