Recorded live on October 21st at 1 PM EST
Misclassifying Workers: Common Mistakes and Key Considerations – Part 2
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MP: Good afternoon, and thank you for joining us today for part two of the employee classification webinar series.
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MP: And for anybody who missed last week we’ll be sending out a link later today, along with the recording of this program and the slides.
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MP: I mean women, the head of marketing here at MP and for those of you joining us on a webinar for the first time MP, is a full service human capital management company.
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MP: offering a complete suite of products and services to support employers for the entire employee life cycle.
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MP: Including recruiting HR payroll benefits administration time and attendance and compliance assistance.
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MP: We support our clients with cutting edge technical solutions, as well as proactive reliable service and deep HR and payroll expertise at MP, we are wired for HR and help our clients succeed by aligning their people strategy with their business goals.
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MP: You have two phenomenal presenters today from the HR team here in MP sherry Heller and amanda Leonardo.
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MP: sherry is the sherm and phr certified HR partner here at MP, she has over 20 years of experience and employee relations, training and development strategic planning and policy development.
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MP: sherry earned a master of education and instructional design from umass she spent many years in retail management prior to getting into HR which provides me with a unique business focused human resources.
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MP: amanda Leonardo as an HR partner here MP as well, she currently provides HR support to businesses of all sizes in a variety of industries, she previously managed HR for human services nonprofit organization.
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MP: amanda received her BA from Duquesne University in Pittsburgh and received her sherm certification in 2019.
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MP: Just a few housekeeping notes on if you’d like to submit a question during the program please use the Q amp a feature at the bottom and we’ll address questions at the end of the Program.
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MP: And again, a recording of the webinar will be sent out later today, following the presentation, along with the slides and with that i’m going to hand them off to sherry.
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Sheri Heller: Thank you amy and good afternoon everybody, as always we start with our legal disclaimer we are going to be talking a lot about employment law today, but this training is intended for informational and educational purposes only.
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Sheri Heller: While we hope you learn a lot today we’re not attorneys and we don’t want anything to be construed as legal advice.
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Sheri Heller: With that let’s talk about our presentation topics today.
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Sheri Heller: So if you joined us last week for Part One of our misclassified worker series, we were focusing on exempt non exempt classifications under the fair Labor standards act today we’re going to shift our focus to determining whether.
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Sheri Heller: Whether a worker is in employee a w two employee or a 1099 independent contractor.
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Sheri Heller: So we’ll talk a little bit about the difference between the two of those then we’ll look at how independent contractors are defined by the Department of Labor.
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Sheri Heller: Also, by the irs and then we’ll also talk about State law considerations, then we’ll start we’ll talk a little bit about miss classification audit triggers miss classification myths and tips for using contractors.
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Sheri Heller: So with that let’s talk about difference between a w two and 1099 worker, so how you classify a worker is subject to review by various government agencies, including.
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Sheri Heller: The irs department of Labor state workers compensation state unemployment insurance state tax departments and state Labor departments.
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Sheri Heller: Each of those agencies work independently of each other and their definition of employee can differ depending on the Agency and the applicable laws so we’re going to take a look at how the Department of Labor irs in various States look at independent contractors.
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Sheri Heller: So when we’re trying to decide whether somebody should be classified as an independent contractor or a or an employee he.
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Sheri Heller: The impact of that and that classification really affects payroll and wages taxes and who’s responsible for paying them.
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Sheri Heller: eligibility for workers COMP and unemployment insurance eligibility for company benefits and protection under Federal and State laws.
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Sheri Heller: bottom line is both at the State level and at the federal level miss classifying somebody as an independent contractor from both the state and federal perspective.
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Sheri Heller: Is that you are denying people protection under the various Federal and State laws you’re denying them benefits and the opportunity to collect unemployment, as well as affecting payroll taxes and wages so.
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Sheri Heller: With that we’re going to talk a little bit about under the Department of Labor at this federal level how they define independent contractors.
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Sheri Heller: You may have heard a lot of media coverage throughout 2020 and 2021 regarding independent contractor awards.
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Sheri Heller: So during the trump administration, the US Department of Labor proposal update to the rules governing the classification of independent contractors.
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Sheri Heller: However, shortly after the Biden administration took office, the Department of Labor issue to notice to withdraw their proposal so as.
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Sheri Heller: As a result, on may 620 21 to propose independent contractor rule was officially withdrawn and the Department of Labor will continue to use the more traditional quote unquote X.
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MP: looks like we have a technical issue with audio that we’re working to resolve.
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MP: Please stand by.
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Sheri Heller: Hello.
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Amanda Leonardi: There we go.
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MP: Here we go.
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Sheri Heller: Okay, you got me.
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MP: I got you.
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Sheri Heller: All right, I don’t know where when.
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Sheri Heller: Okay.
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Sheri Heller: So we’re talking about the mls and limit relationship.
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Amanda Leonardi: hey Sorry, I think we need to re share the slides.
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Sheri Heller: hang on.
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Sheri Heller: There we go how’s it looking.
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Sheri Heller: got it.
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Amanda Leonardi: Good as new.
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Sheri Heller: Oh awesome awesome Well, this is the day of technical difficulties alright.
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Sheri Heller: So we’re going to look at at the kind of questions you should be asking yourself as an employer for each of these for each of these factors.
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Sheri Heller: So, in relation to the extent services rendered are integral part of the business questions you want to ask our does the worker perform the primary type of service that your business provides for customers or clients.
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Sheri Heller: or a regular job that is part of your businesses overall process or production.
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Sheri Heller: So this factor relates not to the percentage of work done by the worker, but to the nature of the work, in other words, is the work done in essential part of your business.
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Sheri Heller: work that is a necessary part of a regular traitor business is normally done by employees, so, for example, a baker is a key element in a bakery bakery business.
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Sheri Heller: it’s likely that the bakery would have the right to control the direct the work of the Baker, because your success determines the success of the bakery this would indicate an employer employee relationship.
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Sheri Heller: On the other hand, a plumber that you engage to fix the pipes in the bathroom of a store is performing a service on a one time or occasional basis that’s not an essential part of your business.
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Sheri Heller: A certified public accountant engaged and preparing tax returns and financial statements for the business could also be an example of an independent contractor.
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Sheri Heller: When a worker furnishes tools and materials such as a plumber would especially when a substantial sum is involved, there is an indication of independence.
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Sheri Heller: Another question you would ask is does the worker regularly supervised any of your business employees.
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Sheri Heller: A worker who regularly supervises any of your employees is an employee acting in the capacity of a manager or supervisor.
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Sheri Heller: and independent contractors should only be supervising workers that they have hired and pay.
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Sheri Heller: An independent contractor, such as an accountant who, in the course of their work request information or other for other action from an employee of your business is not engaged in a regular supervision of that employee.
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Sheri Heller: And you also would want to ask does the business haven’t pleased with substantially similar job functions duties and responsibilities.
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Sheri Heller: So if the work being done is basically the same as work that is normally done by your employees it indicates that the worker is an employee.
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Sheri Heller: This applies even if the work is being done on a one time basis, so, for instance, to handle an extra workload or replace an employee who’s on vacation or workers hired to fill in on a temporary basis, this worker is a temporary employee, not an independent contractor.
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Sheri Heller: Alright, so the next the next factor that they look at is the permanency of the relationship.
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Sheri Heller: So you should be asking did your business engage the worker with the expectation that the relationship will continue indefinitely, rather than a specific project or period.
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Sheri Heller: So, if your business hires a worker with the expectation that the relationship will continue indefinitely, rather than a specific.
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Sheri Heller: project or period, this is generally considered evidence that the intent was to create an employer employee relationship.
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Sheri Heller: The employee relationship between the independent contractor in their clan ends when the job is finished, so if the worker continues to be paid during downtime this also points to a more prominent employer employee relationship.
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Sheri Heller: If the relationship consists of continuing or recurring work the relationship is contingent consider permanent, even if the services rendered on a part time basis are seasonal nature or if the person actually works for only a short time.
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Sheri Heller: Another question, you should ask is can the worker be discharged at any time without risking a lawsuit.
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Sheri Heller: So if a business has the right to discharge, a worker at well with and without liability that worker is likely, an employee.
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Sheri Heller: The business exercises control through the ever present threat of dismissal, which causes the worker to obey instructions, so the worker is dependent on the business that they serve.
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Sheri Heller: An independent contractor, on the other hand, cannot be just charged without liability as long as they produce a result that measures up to the contract specifications.
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Sheri Heller: Next factor is the amount of the alleged contractors investment.
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Sheri Heller: So again, a question that you would want to ask is is the investment made by the worker in order to perform the services minor or relatively small compared to the investment of your business.
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Sheri Heller: So this factor takes into account whether the worker must make a substantial monetary investment in order to perform the services, the investment made by the worker.
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Sheri Heller: Worker are compared to the investment need by the business, so if the amount invested by the worker is minor a relatively small compared to the investment of the business.
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Sheri Heller: This factor ways towards an employment relationship, the converse is also true.
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Sheri Heller: So there is no set dollar or percentage limit that qualifies as a substantial investment it’s really determine on a case by case basis.
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Sheri Heller: Now the question to ask is is the worker reimburse for any purchases travel other expenses incurred in connection with the work.
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Sheri Heller: So, if your business reimburses expenses incurred in connection with the work the worker is generally an employee.
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Sheri Heller: An independent contract, on the other hand, is usually paid on a job basis and is responsible for all incidental expenses incurred in connection with the work another question to ask is does your business pay the workers assistance or other workers.
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Sheri Heller: A worker who’s assistant is excuse me, is paying by your business is likely, an employee, a worker who pays their assistance or other workers is likely, an independent contractor.
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Sheri Heller: Like next factor is the nature and degree of control by the principal.
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Sheri Heller: So, again question to ask is the worker required to comply with your instructions about when, where and how their services and we perform.
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Sheri Heller: So, if your business has the right to control or direct not only what has to be done, but also when, where and how it has to be done, then the workers are more most likely employees.
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Sheri Heller: If your business can direct or control, only the result of the work done and not the means and methods of accomplishing the result than the workers are probably independent contractors.
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Sheri Heller: So types of instructions could include things like wearing when the work is done what tools or equipment to use what workers to hire or assist with the work.
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Sheri Heller: were to purchase supplies and services, what work must be performed by a specific intimate specified individual.
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Sheri Heller: Or what order or sequence to follow when performing the work the more detailed instructions, the more control the business exercises over the worker.
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Sheri Heller: The more detailed instructions indicate that the worker as an employee less detailed instructions reflect less control indicating that the worker is more than likely an independent contractor.
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Sheri Heller: Does your business generally exercise more than minimal supervision of the worker.
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Sheri Heller: Minimal supervision is a factor way towards an independent contractor status generally a business manager assigns reviews and significantly supervisors, only the work of the employees.
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Sheri Heller: The requirement of regular oral or written reports indicates control and therefore the employee therefore employee status since the work I must account for their actions, an independent contractor is usually not required to file reports that constitute a review of their work.
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Sheri Heller: And thirdly, does your business, have the right to hire fire or supervisor assistance of the worker if your business hires fires or supervises assistance of the worker that worker is probably an employee.
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Sheri Heller: While an independent contractor would hire fire supervisor own employees or their own assistance under a contract that requires them to provide materials and Labor is responsible for the results of the workers performance.
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Sheri Heller: And then the alleged contractors opportunity for profit and loss is another factor that’s looked at.
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Sheri Heller: Is the worker unable to make business decisions that would result in the worker earning a profit or encouraging encouraging a financial loss.
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Sheri Heller: So the ability to realize a profit or incur law strongly in case indicates that a worker is an independent contractor.
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Sheri Heller: When workers are insulated from loss or restricted in the amount of profit, they can gain they are usually employees.
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Sheri Heller: An individual is normally an independent contractor when they are free to make business decisions which impact their ability to profit or suffer a loss, this involves real economic risk, not just the risk of not getting paid.
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Sheri Heller: So, whether a profit is realized or loss suffered generally depends on management decisions.
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Sheri Heller: That is the one responsible for the profit or loss can use their own ingenuity initiative and judgment and conducting business, excuse me and conducting business independent contractors typically can invest significant amounts of time or capital in their work without guarantee of success.
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Sheri Heller: And then the amount of initiative judgment or foresight, an open market competition with others, so that that the questions you would ask er does the worker perform only routine tasks requiring little training.
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Sheri Heller: So a low level technical skill, is a strong evidence of an employment relationship since.
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Sheri Heller: Since the low level of the skill level declines there’s less room to exercise the discretion necessary for independence.
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Sheri Heller: The courts have held that workers who are considered unskilled or semi skilled are the type of workers, the law is meant to protect and are generally employees.
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Sheri Heller: Another question to ask is did your business spend significant amounts of time and money, providing training for those for the workers.
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Sheri Heller: So businesses hire independent contractors, with the understanding that the workers provided will possess the necessary skills and initiative to satisfy the the.
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Sheri Heller: satisfactorily perform their job well businesses generally only pay for the development of occupational skills as an investment in their own employees.
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Sheri Heller: So some other factors that the courts will look at in determining employee status are things like did you give them a job description you keep a personnel file on the individual are you giving them performance.
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Sheri Heller: evaluations are you having them sign off on your handbook are they receiving any benefits.
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Sheri Heller: Maybe company equipment are you providing the computer you providing an email address things like that are they listed in your employee directory and did you give them business cards boost factors can indicate an employee status.
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Sheri Heller: All right, and with that i’m going to turn it over to amanda to talk about independent contractors under the irs.
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Amanda Leonardi: All right, thank you, sherry.
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Amanda Leonardi: So as you’re just mentioned we’re going to look at how the irs assesses whether a worker is an employee or an independent contractor.
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Amanda Leonardi: And if you’re like me, you get the heebie jeebies when you hear or have to talk about the irs but we’re going to power through it together as a team here.
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Amanda Leonardi: So the irs uses what’s commonly referred to as the 20 common law factors to assess whether a worker is an employee or an independent contractor for employment tax purposes.
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Amanda Leonardi: And the general rule of thumb kind of the elevator pitch according to the irs is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
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Amanda Leonardi: On the flip side here the irs considers and employee to be anyone who perform services for you, if you can control what will be done and how it will be be done.
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Amanda Leonardi: And so what matters is that you have the right to control the details of how the services are performed so again.
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Amanda Leonardi: You have a contractor relationship in the eyes of the irs if you only have the right to control or direct the ultimate end result of the work and not actually what will be done and how it will be done.
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Amanda Leonardi: And you have an employee relationship, if you can control what will be done and how it will be done.
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Amanda Leonardi: Alright, so, as I mentioned earlier, the irs uses common law factors to examine whether a worker is an employee or contractor and, although these are still valid today.
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Amanda Leonardi: The irs has actually grouped the more relevant ones into three main categories of evidence which so nice of them to simplify things.
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Amanda Leonardi: And so, when you’re using the common law test to make this determination all information that provides evidence of the degree of control and the degree of independence must really be considered.
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Amanda Leonardi: And again, this falls into three main categories, so we have the behavioral control financial control, and then the type of relationship of the parties so first we’re going to tackle.
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Amanda Leonardi: The behavioral control and this really covers the facts that show whether the business has a right to direct or control how the work is being done through instructions trainings or other means.
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Amanda Leonardi: And an employee’s generally subject to you know business instructions about where, when and how to work so first you want to think about whether the worker is required to comply with instructions.
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Amanda Leonardi: On those items, and this is really an important factor, so if your business does have the right to control or direct not only what’s.
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Amanda Leonardi: You know to be done, but also when, where and how it’s being done, then the worker is is most likely an employee.
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Amanda Leonardi: If your business can direct or control, only the result of the work, and not the means and methods of accomplishing that result than the workers are probably independent contractors.
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Amanda Leonardi: And so, some types of instructions when they when they define the word instructions.
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Amanda Leonardi: include things like when and where to do the work what tools or equipment to use what workers to hire or assist with the work you know where to purchase those supplies and services.
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Amanda Leonardi: What work must be performed by a specified individual so those all those items really had a lot of overlap with the Department of Labor standards that that sherry mentioned earlier.
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Amanda Leonardi: and keep in mind independent contractors are free to do jobs in their own way, using specific you know methods that they.
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Amanda Leonardi: they choose, and so a business engages an independent contractor ultimately for the jobs end result, and when a worker is required to follow company procedures company manuals or is given specific instructions on how to perform the work.
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Amanda Leonardi: Then you really have an employee relationship there.
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Amanda Leonardi: And then the next thing you want to take a look at when it comes to behavioral control is any training that the business.
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Amanda Leonardi: is giving the worker, so you know, providing detailed methods and procedures to be used in performing a task that is that’s what they need when when they say training.
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Amanda Leonardi: And if the business provides the worker with you know training on how did you do the job, this indicates that you know the the business wants the job done in a particular way, so this is strong evidence that the worker is an employee.
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Amanda Leonardi: and training can really be as informal as requiring the worker to attend meetings or work alongside someone with more experience.
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Amanda Leonardi: And you know and periodic or ongoing training about procedures or certain methods is even stronger evidence of an employer employee relationship so again a contractor uses their own methods and, in turn, does not need to receive training from the purchaser of those services.
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Amanda Leonardi: Alright, the next factor here is financial control, and this covers the facts that show whether the business has a right to director control the financial and business aspects of the workers job.
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Amanda Leonardi: So these controlling factors include the extent to which the worker has on reimbursed business expenses.
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Amanda Leonardi: So if the employer pays a worker business and travel expenses, the worker is is generally an employee and employer who’s able to control expenses also generally retains the the right to regulate and direct the workers business activities.
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Amanda Leonardi: On the other hand, a worker who’s paid, you know, on a job basis and who has to take care of all the incidental expenses on their own is generally an independent contractor and really since this person is accountable.
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Amanda Leonardi: to no one else for those expenses, the person is free to work according to their own methods and means so that’s more of a contractor relationship.
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Amanda Leonardi: Then we have the extent of the workers, investment and an independent contractor often has pretty significant investment in the either facilities or tools that they use.
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Amanda Leonardi: in performing the services for other people or other businesses and, that being said, a significant investment isn’t really necessary for independent contractor status but is oftentimes considered evidence.
00:43:12.630 –> 00:43:23.760
Amanda Leonardi: Then we have the extent to which the worker makes their services available to the relevant market, so an independent contractor is generally free to seek out business opportunities on their own.
00:43:24.810 –> 00:43:31.530
Amanda Leonardi: They often you advertise maintain you know, a business location are available.
00:43:32.610 –> 00:43:43.230
Amanda Leonardi: To work in relevant markets and when individuals hold themselves, you know out to the general public as available to perform services, similar to those performed for an employer.
00:43:43.590 –> 00:43:53.130
Amanda Leonardi: it’s evidence that the individuals are operating separately, you know, a separately established business and would normally be an independent contractor.
00:43:54.060 –> 00:44:08.760
Amanda Leonardi: However, if a worker perform services for only one person, one business does not advertise their their services to the general public and perform services on kind of a continuing basis, it is an indication of an employee relationship.
00:44:11.070 –> 00:44:22.620
Amanda Leonardi: So, then, we have how the business pays for the worker and an employee is generally guaranteed a regular wage you know amount for hourly weekly, monthly pay.
00:44:23.550 –> 00:44:41.490
Amanda Leonardi: A certain period of time and and this usually indicates that a worker is an employee, even when the wage or salary is is supplemented by a Commission, on the other hand, an independent contractor is often paid a flat fee or an on time and materials basis for a job.
00:44:42.960 –> 00:44:51.540
Amanda Leonardi: But with That being said, it can be common in some professions, such as law to pay independent contractors hourly but that’s something to keep in mind.
00:44:52.290 –> 00:44:59.880
Amanda Leonardi: And then, last but not least, the extent to which the worker can realize a profit or loss, so an individual is is typically an independent contractor.
00:45:00.210 –> 00:45:19.200
Amanda Leonardi: When they’re free to make business decisions that really impact their ability to profit or to suffer a loss, and this really involves you know true economic risk, not just the risk of not getting paid So those are the financial factors at the irs looks.
00:45:20.220 –> 00:45:25.020
Amanda Leonardi: looks for and then last but not least, we have the third factor, which is the type of relationship.
00:45:25.500 –> 00:45:30.990
Amanda Leonardi: And this covers facts that relate to how the worker and the business owner perceive their relationship so.
00:45:31.560 –> 00:45:43.290
Amanda Leonardi: You know those facts that show the type of relationship can include things like written contracts, describing the the relationship of the parties and what relationship they intend to create.
00:45:44.040 –> 00:45:53.370
Amanda Leonardi: Whether or not the business provides the worker with employee type benefits like insurance or a pension plan vacation pay sick pay those types of things.
00:45:54.270 –> 00:46:05.070
Amanda Leonardi: The permanency of the relationship so if you engage a worker with the expectation that the The relationship is going to continue indefinitely, rather than for more of a specified.
00:46:05.790 –> 00:46:14.400
Amanda Leonardi: period of time or a specified project, this is generally considered evidence that your intent was to create an employer employee relationship.
00:46:15.420 –> 00:46:21.960
Amanda Leonardi: And then the extent to which services performed by a worker or a key aspect of the regular business of a company so.
00:46:22.860 –> 00:46:28.860
Amanda Leonardi: If a worker, you know provide services are a key aspect of your regular business activity.
00:46:29.190 –> 00:46:40.620
Amanda Leonardi: it’s more likely that you’ll have the right to direct and control their activities so, for example, if a law firm hires an attorney it’s likely that it will present, you know that attorneys work as its own.
00:46:41.010 –> 00:46:48.330
Amanda Leonardi: And would have the right to control or direct that work in this would indicate and employer employee relationship.
00:46:52.110 –> 00:47:00.060
Amanda Leonardi: Alright, so we wanted to share some practical examples that illustrate the application of the irs test factors and for the purposes of time today and due to.
00:47:00.450 –> 00:47:08.040
Amanda Leonardi: Some of the technical difficulties i’ll just go through through this first example, but there are three of them, that you can review.
00:47:09.000 –> 00:47:25.500
Amanda Leonardi: When we send out a copy of the slide deck afterwards, but this first example on your screen, here we have an attorney or an accountant they have their own office they advertise in the yellow pages of the phone book under throat throwing it back there under attorneys or accountants.
00:47:26.550 –> 00:47:48.480
Amanda Leonardi: You know they bill clients by the hour they’re engaged by you know, a job or paid an annual retainer and they are able to hire a substitute to do the work, so in this example on this would be an example of an independent contractor, however, on the flip side if the Attorney or accountant.
00:47:49.620 –> 00:47:55.470
Amanda Leonardi: They would be considered an employee if they’re employed by a firm to handle their legal affairs or financial records.
00:47:56.100 –> 00:48:09.630
Amanda Leonardi: Work in an office at the firm’s place of business attend meetings as needed in the firm bills, the clients and pays the Attorney or accountant on a regular basis, so you can see, the different factors that we just covered coming into play here.
00:48:10.440 –> 00:48:20.340
Amanda Leonardi: In the contractor example they’re handling and advertising their own business, you know, investing in their own space, taking care of the billing themselves, they played on paid on a flat fee basis.
00:48:20.820 –> 00:48:33.210
Amanda Leonardi: and have the ability to hire help for themselves to step in and assist with the work versus the employee example where all of those things are handled and controlled directly by the firm.
00:48:34.800 –> 00:48:49.170
Amanda Leonardi: Share if you could get through, yes to the next slide perfect and so not to use scare tactics here, but there are some irs penalties for misclassification that you certainly want to avoid at all costs.
00:48:50.250 –> 00:48:59.580
Amanda Leonardi: If the irs determines that an individual has been misclassified it may levy penalties against the employer, including but not limited to a $50 fine for each.
00:48:59.850 –> 00:49:11.700
Amanda Leonardi: form w to the employer failed to file on each misclassified employee a penalty have up to 3% of the wages, plus up to 40% of the fica taxes that were not withheld.
00:49:12.510 –> 00:49:20.430
Amanda Leonardi: From the employee and up to 100% of the the matching fica taxes, the employer should have paid so they want their money honey.
00:49:20.820 –> 00:49:30.390
Amanda Leonardi: And if the irs you know determines that an employer misclassified its employees will folk willfully knowing that they were misclassified the the penalties are even greater.
00:49:30.780 –> 00:49:39.360
Amanda Leonardi: And these penalties can be costly and, in some cases, devastating for an employer, so you really want to do your due diligence and make sure your employees are properly classified.
00:49:41.700 –> 00:49:43.260
Amanda Leonardi: Alright, throwing it back to you sherry.
00:49:43.740 –> 00:49:47.760
Sheri Heller: Alright, so we’ve talked about irs we’ve talked about department of Labor.
00:49:48.270 –> 00:49:53.280
Sheri Heller: But state unemployment state employment and workers compensation laws are often more stringent than the.
00:49:53.580 –> 00:49:55.680
Sheri Heller: federal dll or irs.
00:49:56.700 –> 00:50:07.140
Sheri Heller: Excuse me so most state laws contain strict test to determine whether there’s a sufficient absence of control by an employer, that the worker is not an employee, but an independent contractor.
00:50:07.770 –> 00:50:12.000
Sheri Heller: Many of the States provide criteria that’s commonly known as the ABC test.
00:50:12.300 –> 00:50:19.680
Sheri Heller: Under which service for remuneration is considered employment and the worker is an employee unless each of these three factors are met.
00:50:19.980 –> 00:50:34.170
Sheri Heller: So first off is the worker is free from direction or control and the performance of the work under the contract of service, and in fact so again, just like what the irs or do well, is that you, as the as the business only control.
00:50:34.830 –> 00:50:39.210
Sheri Heller: What is the final product, what is to be done not how and when and where it’s done.
00:50:40.200 –> 00:50:50.400
Sheri Heller: Second, excuse me a or B is the services performed either outside the usual course of the business for which it is performed So if you are a.
00:50:51.300 –> 00:50:57.930
Sheri Heller: software company, and you are bringing on an independent contractor who’s going to be doing software development.
00:50:58.260 –> 00:51:06.180
Sheri Heller: That is not outside of your usual course of business, it is part of your usual course of business, so you would not meet that that that test.
00:51:06.840 –> 00:51:19.530
Sheri Heller: Is the individual customarily engaged in an independent trade occupation profession or business so again, you need to keep in mind that the worker has to meet all three of those factors to be considered an independent contractor.
00:51:20.490 –> 00:51:25.830
Sheri Heller: Excuse me, all right and i’m going to bounce it right back to you amanda to talk about these triggers.
00:51:27.240 –> 00:51:28.590
Amanda Leonardi: All right, so.
00:51:29.880 –> 00:51:44.220
Amanda Leonardi: it’s important to know that claims of employment classification, are on the rise, due in large part to stepped up audit and enforcement efforts by both the federal government and and states targeting employees that improperly treat.
00:51:44.880 –> 00:51:49.470
Amanda Leonardi: Excuse me, employers that improperly treat employees as independent contractors.
00:51:50.280 –> 00:52:02.130
Amanda Leonardi: And the focus on how employers classify their workers, it is honestly likely to increase as the irs and the dll carry out their plans to audit thousands of companies which does include small businesses.
00:52:02.700 –> 00:52:11.880
Amanda Leonardi: For possible miss classifications, in addition, you know state officials are really searching for ways to boost revenue, especially after last two years.
00:52:12.210 –> 00:52:21.390
Amanda Leonardi: And i’ve also intensified investigations of state wage and hour laws and oftentimes you know we think there’s no way there they’d be knocking on my door.
00:52:22.050 –> 00:52:34.530
Amanda Leonardi: However, the reality of the situation is that these things can be easily triggered based upon the actions of your your workers, so we wanted to take a minute to go over some common worker.
00:52:34.860 –> 00:52:41.580
Amanda Leonardi: misclassification audit triggers so you’re aware of how you know, Miss classifications are oftentimes brought to light so.
00:52:42.810 –> 00:52:54.660
Amanda Leonardi: These things can be be triggered if the 1099 independent contractor filed a claim for unemployment benefits, this creates you know suspicion, because independent contractors are not eligible for unemployment.
00:52:55.260 –> 00:53:04.110
Amanda Leonardi: And the another trigger is if the independent contractor files a workers compensation or a disability claim against the employer.
00:53:04.890 –> 00:53:13.170
Amanda Leonardi: If someone is truly an independent contractor, they should carry workers compensation on themselves and disability insurance themselves.
00:53:13.680 –> 00:53:23.940
Amanda Leonardi: Because they’re not eligible through an employer also if a worker receives a form w two and a 1099 form from the same employer in the same year.
00:53:24.720 –> 00:53:31.380
Amanda Leonardi: that’s oftentimes an indicator that they converted from a 1099 independent contractor to a direct tire of the company.
00:53:32.310 –> 00:53:44.790
Amanda Leonardi: And oftentimes you know if they perform the same work as the 1099 contractor as a w two employee the irs might wonder why they were not originally classified as an employee.
00:53:45.540 –> 00:53:55.800
Amanda Leonardi: And it also can be triggered if the worker feels that they’re being improperly treated as a contractor and files and unpaid, you know minimum wage overtime complaint with the dll.
00:53:57.960 –> 00:54:13.770
Amanda Leonardi: Also, a red flag, if an independent contractor, you know, has been working for a particular company for a long period of time and then last but not least, if you have a high 1099 volume that might be an indicator of misclassification as well.
00:54:16.950 –> 00:54:18.630
Amanda Leonardi: Alright hit us with the Miss sherry.
00:54:19.830 –> 00:54:21.780
Sheri Heller: Alright, so.
00:54:23.400 –> 00:54:26.820
Sheri Heller: There we go wasn’t cooperating there alright so some of the myths are going to.
00:54:26.820 –> 00:54:35.340
Sheri Heller: dispel excuse me with number one if a worker is an independent contractor under one lot, they are an independent contractor under all odds.
00:54:35.580 –> 00:54:43.500
Sheri Heller: So as we’ve discussed the irs department of Labor and various state and local laws may have different tasks to determine independent contractor status.
00:54:43.830 –> 00:54:52.980
Sheri Heller: So independent contractor could meet the standard under the irs control test, but may not meet the standard set out by the state’s ABC chats or workers COMP laws.
00:54:53.310 –> 00:55:02.430
Sheri Heller: Especially from multi state employers it’s really important to know how the state defines independent contractor for each state in which you have workers.
00:55:03.990 –> 00:55:15.270
Sheri Heller: This number two you can engage someone as an independent contractor for a trial period and hire them as an employee, so this goes back to one of the triggers that amanda talked about where you would have.
00:55:15.510 –> 00:55:21.660
Sheri Heller: Paying you would have somebody of filing a 1099 and a w two with the irs in the same year.
00:55:22.320 –> 00:55:32.220
Sheri Heller: So a lot of companies think it’s okay to hire someone as an independent contractor for a few months as a trial period and then, if they perform well hire them on as an employee at the end of the trial period.
00:55:32.670 –> 00:55:43.830
Sheri Heller: But if you’ve done this, you may not be following the law, particularly if the nature of the relationship and the work performed were the same during the trial period as they were when you hire the person as an employee.
00:55:44.160 –> 00:56:00.030
Sheri Heller: So classifying someone as an independent contractor has nothing to do with timeframe or trial period as a matter of fact, excuse me again filing for 1099 and w two for the same worker in the same taxable year big red flag for the irs excuse me.
00:56:01.680 –> 00:56:13.110
Sheri Heller: This number three I have my own employer identification number or paperwork stating that I am performing services as a limited liability corporation or other business entity, this means i’m an independent contractor.
00:56:13.560 –> 00:56:22.110
Sheri Heller: Not so much so having your own E N, or people work stating that you’re performing services as an llc sole proprietorship or any other type of business.
00:56:22.470 –> 00:56:28.650
Sheri Heller: Does not by itself bake you an independent contractor, this is really common in certain industries.
00:56:29.160 –> 00:56:36.540
Sheri Heller: For example, software software development, a lot of software engineers will incorporate themselves as an llc.
00:56:37.170 –> 00:56:50.340
Sheri Heller: And they want you to pay them as an independent contractor but towards you’ve got to keep in mind is if your company is a software development company they’re performing the basics of the basic business of your business.
00:56:50.670 –> 00:56:55.650
Sheri Heller: So it is really you as the employer that has all the risk and liability.
00:56:56.190 –> 00:57:07.440
Sheri Heller: So regardless of how the employee outside how the worker wants to be paid, it is really up to you to make sure that you’re complying so under the FSA how how you are the employer.
00:57:08.010 –> 00:57:19.860
Sheri Heller: characterizes your relationship is irrelevant and determining whether you’re an employee, what matters is whether the reality of the situation indicates that you’re economically dependent on the employer, which would make you an employee.
00:57:20.130 –> 00:57:34.980
Sheri Heller: or in business for yourself as an independent contractor and for federal tax purposes, how you and the employer characterize the relationship is only one factor considered in many in determining whether the employer has the right to control how you do the work.
00:57:37.440 –> 00:57:45.540
Sheri Heller: This number four i’m an independent contractor because it’s an established practice in my industry to classify workers, like me, as independent contractors.
00:57:46.380 –> 00:57:54.240
Sheri Heller: That happened a few number of years ago here in Massachusetts it was pretty common industry practice for restaurants to.
00:57:54.870 –> 00:58:03.210
Sheri Heller: Have delivery people and call them independent contractors, the state really came down hard on restaurants, which is how a lot of these.
00:58:03.630 –> 00:58:14.880
Sheri Heller: You know, some grub hub and businesses, like that came about, excuse me, because restaurants realized that if they were employing people to do that kind of work, there was an employee and they had to treat them as such.
00:58:16.110 –> 00:58:20.550
Sheri Heller: So, under the umbrella say what matters again is the reality of the situation.
00:58:21.000 –> 00:58:26.760
Sheri Heller: That you’re economically dependent on the employer, which makes you an employee or the biz or in business for yourself.
00:58:27.090 –> 00:58:36.930
Sheri Heller: And then again for federal tax purposes, what matters is whether the employer or has the right to control how you do the work which will determine whether you’re an independent contractor or employee.
00:58:38.070 –> 00:58:43.680
Sheri Heller: And finally myth number five i’m an independent contractor because I signed an independent contractor agreement.
00:58:44.340 –> 00:58:47.910
Sheri Heller: So signing an agreement does not make you an independent contractor.
00:58:48.210 –> 00:59:00.570
Sheri Heller: Under the FSA you’re an employee if, as a matter of economic reality your work indicates that you are economically dependent on an employer and you’re an independent contractor if you’re in business for yourself.
00:59:00.900 –> 00:59:06.300
Sheri Heller: Any label that you are the employer give to the relationship, even in an agreement signed by you, is irrelevant.
00:59:06.660 –> 00:59:17.610
Sheri Heller: Instead, what matters is whether the reality of the situation indicates that you are economically dependent on the employer again you’re an employee or in business for yourself as an independent contractor.
00:59:18.090 –> 00:59:29.100
Sheri Heller: So it’s really important to make sure that you’re properly classifying all right, and then amanda is going to take us home with some tips for using independent contractor.
00:59:30.330 –> 00:59:33.030
Amanda Leonardi: Alright, so yeah we wanted to provide you with some.
00:59:33.030 –> 00:59:43.860
Amanda Leonardi: tips and tricks, for, if you do utilize independent contractors, how you ensure you aren’t blurring the lines between a contractor and an employee.
00:59:44.910 –> 01:00:05.460
Amanda Leonardi: So be careful advertising for independent contractors don’t please add saying help wanted and avoid using phrases such as salary wages or steady work when you’re talking about a contractor, so instead you want to look for independent contractors who have placed their own ads.
01:00:07.050 –> 01:00:14.430
Amanda Leonardi: When establishing the relationship with the contractor, you also want to avoid setting a regular pattern of daily or weekly hours.
01:00:14.820 –> 01:00:25.230
Amanda Leonardi: A as we’ve talked about a self employed individual you know, presumably has the opportunity to select when and where about they’ll work in relation to all of their customers.
01:00:26.010 –> 01:00:35.220
Amanda Leonardi: who also want to allow contractors to supply their own tools and equipment supplies, you know, wherever possible, in in the performance of the services.
01:00:35.490 –> 01:00:53.760
Amanda Leonardi: required, and this will you know help demonstrate that there you know, is a is a risk of loss, as well as an opportunity for profit for them, you don’t want to use the the contractor or their employees to perform the same jobs as your own employees, so there has to be differentiation there.
01:00:54.990 –> 01:01:06.180
Amanda Leonardi: Do not permit the contractor to supervise any of your employees do not require formal or informal company provided training for the contractor or the contractors employees.
01:01:09.690 –> 01:01:20.250
Amanda Leonardi: don’t require that the contractor performs services personally if they have someone else that they employ you know that other person can step in and assist and getting the job done.
01:01:21.090 –> 01:01:29.100
Amanda Leonardi: don’t require that the contractor provides regular written or oral reports about you know work in progress and the status.
01:01:30.510 –> 01:01:39.000
Amanda Leonardi: Allow contractors to hire their own assistance if necessary and make sure that they are paying the payroll taxes normally required for such employees.
01:01:39.930 –> 01:01:49.560
Amanda Leonardi: don’t include contractors unless the insurance coverage, excuse me under any insurance coverage for you know things like workers compensation health insurance.
01:01:50.190 –> 01:02:07.830
Amanda Leonardi: benefits those types of things, those are specific for employees, if possible, compensate such independent contractors on a per job basis rather than per hour per week and always ask for an invoice or statement before paying for any work that has been performed.
01:02:09.990 –> 01:02:13.920
Amanda Leonardi: If possible, make checks payable to a company, rather than to an individual.
01:02:14.400 –> 01:02:25.530
Amanda Leonardi: Do not directly reimburse contractors for any expenses, they might have things like gasoline meals, etc, these expenses really should stand as part of the the contractor set fees.
01:02:25.980 –> 01:02:34.710
Amanda Leonardi: Remember that you know in in theory you you can’t just charge a contractor from employment, so if you’re dissatisfied with a contractors performance.
01:02:34.980 –> 01:02:44.340
Amanda Leonardi: You know, you want to take a look at your contract for for a remedy, if there isn’t a contract, you know severe relations with the contractor by offering no more work.
01:02:45.000 –> 01:02:56.670
Amanda Leonardi: And last but not least, put it in writing so it’s best to have a contract and writing with an independent contractor and, although this as sherry mentioned, this is not, you know conclusive, it can be used.
01:02:57.210 –> 01:03:04.830
Amanda Leonardi: You know, on your behalf, to demonstrate the the validity of an independent contractor relationship, amongst many other factors that we’ve covered today.
01:03:09.870 –> 01:03:10.980
Amanda Leonardi: Well right.
01:03:12.510 –> 01:03:15.900
Sheri Heller: Right so we’re at the top of the hour, so we don’t actually have.
01:03:16.110 –> 01:03:29.430
Sheri Heller: time for questions today, if you do have any questions that come up, you can always reach us at marketing at MP dash hr.com and we’d be happy to get back to you on this topic, and with that we’ll send it back to amy.
01:03:30.300 –> 01:03:37.650
MP: Thank you, sherry and amanda great program and just reminder, we will be sending out a recording of the program as follows the slides later today.
01:03:38.010 –> 01:03:43.650
MP: Thank you all for joining us I just wanna remind everybody that we have a great webinar next week same time same place.
01:03:44.010 –> 01:03:47.700
MP: on employee handbooks covering important information on how to update your.
01:03:48.120 –> 01:03:57.990
MP: Employee policies for cold coded including vaccination guidelines developing remote work policies finding out which states have had marijuana legislation passed in 2021.
01:03:58.320 –> 01:04:10.950
MP: a really great program for our full webinar listing please visit our website, you can register for all of our webinars there as well as download any of our ebooks or other assets thanks again and have a great rest of your day.
Sheri Heller, SHRM-CP, PHR
HR Partner, MP
Amanda Leonardi, SHRM-CP
HR Partner, MP
Misclassifying employees will trigger steep penalties for employers, whether related to exempt, nonexempt, or independent contractor statuses. Additionally, in 2021 and 2022, the DOL has received funding to conduct more audits on independent contractor classification. Employers should attend this two-part webinar series from MP’s HR experts to learn critical considerations for properly classifying workers.
Register for the webinar to:
- Learn how the IRS, Department of Labor (DOL), and various state laws define independent contractors
- Outline the differences between employees and independent contractors
- Find out how to perform the state “ABC test”
- Discover the truth about common misclassification myths