Not everyone that does work for a business is considered an employee. Sometimes, they are contingent workers. If you think that sounds vague and confusing, it is. So we explained the basics to help you understand the type of work they do, and why it matters that you pay attention to how you define the people that work for you.
What is a contingent worker?
Generally, contingent workers are hired to complete specific tasks on a per-project basis under some kind of written agreement or contract. They are not technically employees of a company so the employer has no responsibility to provide work on a permanent basis. Since they work for themselves and not the employer, contingent workers enjoy a certain degree of independence.
Perhaps you know them by one of their many other names: independent contractors, seasonal workers, freelancers, consultants, workers provided by contract firms, leased employees, on-call workers, temporary help agency workers,“1099 workers” (named for the tax document that reportstheir compensation), and interns.
Contingent workers are usually not salaried, do not receive benefits (like health insurance and PTO), and are responsible for paying their own taxes because they are self-employed. The employer does not deduct federal payroll taxes, which is the main reason defining workers correctly is such a big deal for employers. If you misclassify a worker as an independent contractor when they are in fact an employee, you are liable
for paying past taxes including Social Security and Medicare (FICA) and unemployment taxes. Other employee-related issues include, recordkeeping, benefits administration, and wage & hour compliance requirements like overtime pay, workers’ compensation, and family medical leave (FMLA).
Questions to help you think:
- Does the worker or the employer supply the needed equipment and tools?
- Is the work temporary or permanent?
- Does the employer or the worker control the hours of employment?
- Can the worker choose whether or not to come to work (without being afraid of getting fired)?
- Does the worker have independence on how the project or task gets accomplished?
Safe harbor (Section 530 relief): your tax returns indicated you treated workers as independent contractors, and you have a prior history of treating similar workers (in the same position or similar position) as independent contractors.
Advantages and disadvantages of hiring contingent workers
Some businesses may hire contingent workers for specific short-term projects, others may derive the core of their labor from a contingent workforce. They have their benefits and drawbacks, it just depends on how they use them.
- Generally, it could reduce the cost and strain required to manage more employees, in the form of benefits administration, training/development, etc.
- Similarly, you enjoy increased flexibility when you can focus on core business initiatives as opposed to other employee management related issues.
- If a contingent worker(s) does the job off-site, it could reduce overhead costs.
- There is the potential to increase productivity when you are able to use experienced workers with specialized skills to complete specific projects, rather than using less qualified employees.
- You don’t have to provide workers’ compensation coverage for contingent workers, but that also means they could sue you if they get injured on the job.
- There is a greater risk for contingent workers to work for a competitor, which could put confidential business data at risk of being shared.
- You could lose a certain sense of stability, financial or time-wise, if you have higher turnover rates than you would by hiring regular employees.
- Contingent workers are not the same as regular employees, so your management style or HR technologies may have to change to accommodate their differences.
How do I determine if someone is an employee or a contingent worker?
That’s the million-dollar question, and it’s tough to answer, hence all the red-tape surrounding it. The heart of the issue is control - who has it and what can you do with it. A bona fide employee is a worker who is subject to the control of her or his employer. A bona fide employee is a worker who is subject to the control of her or his employer; the employer outlines what work needs to be done and how it should be done. Defining the extent and exercising of that control, varies.
According to the IRS…
The IRS has a test they use to find evidence of the “degree of control and independence” a worker or employer has, within the following three categories:
- Behavioral control: Who has control (and how much control) over where the job is completed, how the job is done, or what the worker does?
- Financial control: Who pays the worker and how? Are business expenses reimbursed? Who provides the tools the worker needs to complete the work?
- Type of relationship: Is there a written agreement or contract between the worker and employer? Does the contract include benefits? Is the work integral or non-integral to the business (what is the nature of the work)?How long has the relationship between both parties been; will it continue after the job is completed?
These are “common law” rules, meaning they are based on tradition as opposed to cut-and-dry legislation. Accordingly, the IRS stresses the questions above should not be treated as a checklist. Employers must take a holistic look at the situation and relationship between worker and employer. There are lots of gray areas in the IRS’s definition and each worker needs to be evaluated on a case-by-case basis.
So, it would be wise to document everything should you need to provide clarification for a worker’s status in the future. If all else fails, you can fill out this SS-8 Form from the IRS, and the IRS will review the facts and determine the worker’s classification for you.
According to the Department of Labor…
Courts use an “economic realities” test that complies with the Fair Labor Standards Act (FLSA). The FLSA is the body of regulations that determines eligibility for employees to receive minimum wage and overtime pay (governed by the Wage & Hour Division (WHD) of the DOL). In order for workers to get overtime, there must be an employee-employer relationship. The FLSA has a broad definition of that relationship – “to suffer or permit to work,” [insert eye roll] which is where the “economic realities” test comes in.
If a worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for herself or himself, the worker might be an independent contractor. There are six factors that need to be taken into consideration when making this determination:
Is the work an integral part of the employer’s business?
- Is the job the worker is performing “integral” to the employer’s business?
Does the worker’s managerial skill affect his or her opportunity for profit and loss?
- Does the worker face a possible loss as a result of their independent business decisions? Does the workers’ skills suggest they are managerial and operate as an independent business?
Relative investments of the worker and the employer
- Has the worker made a significant investment to indicate she or he is an independent business? Does the worker use the investment to support the business after the completion of a project?
The worker’s skill and initiative
- Does the worker exercise independent business judgment or initiative?
The permanency of the worker’s relationship with the employer
- If a permanent relationship is not established, is it based on the worker’s choice or the structure of the industry or the employer?
Employer control of employment relationship
- Who controls hiring and firing, amount of pay, hours of work, and how the work is performed? Does the worker exercise control over meaningful aspects of the work?
Answering yes or no to any of the questions above does not automatically indicate that a worker is a contingent worker or an employee. The factors are not exclusive, which means they may vary by court, and like the IRS, these guidelines need to take into consideration the entirety of a worker and employer’s circumstances.
We know it’s frustrating that these regulations seem imprecise, yet abiding by them can feel so dire. Classifying and misclassifying workers is tricky business, but with knowledge and expertise, you can be compliant and rest assured your employees are actually employees and contingent workers are contingent workers. Get more HR help here.