Do you use independent contractors in your small business? Are you sure they are independent contractors and not employees? Why should you even care? The consequences of misclassifying an employee as an independent contractor can be expensive. This simplified look at classifying workers may help you better understand the issues.
First, most small businesses are well aware that employers have more responsibilities related to employees as compared to independent contractors. Employers accept liability for their employees, and they are likewise subject to obligations such as withholdings and wage minimums. These responsibilities do not apply to independent contractors, so it is easy to see why many employers prefer to hire independent contractors instead of employees.
In Colorado, it is important to understand that every worker is initially considered an employee, and it must be proved otherwise if the worker is to be classified as an independent contractor. Many factors play a role in determining a worker’s classification status. The Colorado Department of Labor, the IRS, and the U.S. Department of Labor all have their own slightly different lists of factors to use when determining worker classification. No single factor is proof of a worker’s status, but the primary factor in determining whether a worker is an employee or an independent contractor is control. Most employers have heard of this so-called “control test,” i.e., employees are controlled and contractors are not controlled. In reality, this “test” is not particularly easy to apply.
In sum, if you have concerns about the classification of your workers, you should talk to an attorney. That said, we have encountered several common misconceptions about the classification of workers. Let’s address the most common ones here so you know what to expect when you talk to your trusted legal counsel about misclassification:
- “I have an independent contractor agreement, so my worker is definitely an independent contractor.” Describing a worker as an independent contractor does not automatically cause him or her to be a contractor, and having a written “independent contractor agreement” does not automatically prove your worker is a contractor. Worker classification is determined on a case-by-case basis. Every case is different. The existence of a written contract is only one minor factor in determining the classification of a worker.
- “My attorney can do whatever needs to be done to make my worker an independent contractor.” There is no foolproof formula for creating an independent contractor relationship. Obviously, there are measures employers can take to properly classify workers, and an attorney can help you. However, your attorney is not your magical fairly godmother, and she cannot waive her magic wand and turn an employee into an independent contractor. It just doesn’t work that way. Sometimes, your workers really are employees!
- “My worker wants to be an independent contractor, so I am never going to have a problem with misclassification.” How your worker wants to be classified is not a factor in classifying your worker. Yes, it is true that independent contractors have the ability to make a fuss if they don’t like being treated as independent contractors. Independent contractors often initiate lawsuits or take other measures to gain benefits such as workers’ compensation coverage. There are also examples across the country of entire industries of workers suing for the right to be treated as employees (thus gaining employee benefits). However, encounters with disgruntled independent contractors are not the only way you may incur liability for misclassification. Audits are conducted by various agencies, and they can be random or based on an unsolicited investigation of your business.
The law is always changing. We cannot guarantee that the information provided herein is current and accurate. Every situation is different. Do not refrain from seeking legal advice from a lawyer because of anything contained in this blog. Consult an attorney for individual legal advice regarding your own situation.