Contractor or Employee? The Difference is Critical


contractorIn what has been called “The New Agent Economy,” more and more employers are opting to use contractors – or “agents” – to outsource any number of tasks that formerly were performed by employees.

For employers, this can be a real money-saver: By using outsourced labor, companies pay less payroll tax, unemployment insurance, and workers’ compensation premiums. However, in this era of increased regulatory scrutiny, it is critical that you correctly categorize your independent contractors to avoid a long list of potential problems.

Problems relating to on-the-job injuries

What many employers fail to realize is that a contractor who is hurt while working on their behalf can make a negligence claim. While it’s easy to assume an independent contractor does not fall under workers’ compensation rules, it may not be so.

It’s important that employers recognize the real costs of losing the protective shield that workers’ comp provides to employers against such lawsuits.

To start defining your employer–employee relationship, one great place to start is with the IRS rules established to classify contractors.

Note, however, that you cannot rely solely on the IRS rules to shield you from a workers’ compensation claim filed by a contractor.

State industrial commissions have been liberal in determining whether a contractor is an employee or not when that worker is injured.

Additionally, the federal government and many states are cracking down on companies’ use of the independent contractor status.

Guidelines to determine status

Here are some guidelines to use when determining the status of a worker. In general, the more “yes” answers, the more likely it is that your worker is an independent contractor.

  • Is your worker employed by another company, or his or her own business entity?
  • Does the worker generally set his or her own hours and supply his or her own tools to complete the job?
  • Is the worker licensed or has he or she devoted significant time and expense to learning the trade?
  • Does the worker advertise or offer his or her services to other companies, as well as to your organization?
  • If the worker makes mistakes, is he or she is responsible for fixing the problem or paying for any damages resulting from the problem?
  • Do you pay the worker on commission or on a per-job basis?
  • Does the worker make or lose money from the work he or she does for your company?

Whether to classify employees as contractors is not always an easy decision.

In most states, if contractors do not have their own coverage, anyone who uses their services can be charged for workers’ compensation exposure on their business policy if the carrier discovers the contractor payment; calling someone a contractor may prove wrong on audit and create problems in other areas.

If you determine you have workers who are independent contractors, ask them to furnish their current certificate of insurance so that you are not charged additional premiums at audit.

Taking the time initially to correctly classify your “agents” will save you money and heartache later.