It's tempting for entrepreneurs to treat workers as contractors, not employees. With contractors, you don't worry about minimum wage, overtime, unemployment benefits, worker's compensation, etc. But states are cracking down on businesses that misclassify employees, and the penalties even for honest mistakes are steep. Here are five things every entrepreneur should know about classifying workers.
Whether you consider the worker a contractor or employee doesn't matter. You don't make that decision.
| WHAT YOU THINK | WHY YOU'RE WRONG |
|---|---|
| I've decided this worker is an independent contractor so that settles it. | As with most things in life, no one cares what you think. Whether you consider the worker a contractor or employee doesn't matter. You don't make that decision. A government agency like the IRS or a state unemployment commission does. The more control your business exercises over how the work is performed, the more likely you'll be considered an employer. |
| Look! We have an independent contractor agreement! | That doesn't prove anything. The contract isn't binding on the state and the investigators probably won't give it much weight. They'll look instead at how you treat the worker and who controls the work - who sets the hours, who decides where the work is done, who provides the tools, etc. |
| So I misclassified someone? They can't shoot me. | Oh the bliss of uninformed optimism! Depending on which agency determines there's been a misclassification, the penalties can be steep. You're immediately on the hook for all unpaid wages and overtime. States can impose steep penalties for not providing worker's compensation coverage. Add to that fines and legal fees and a misclassification can do serious damage. |
| It's a close call, but the state will work with me. | Remember the last time you went to the DMV? The first review is often by a barely-trained bureaucrat taught "when in doubt, everyone is an employee". There are few guardrails to ensure competence and accuracy. You can get bad rulings overturned, but it's expensive and time-consuming. |
| Who's gonna find out? | Music to any divorce attorney's ears. Most investigations start when someone you classified as a contractor files for unemployment benefits or sues for violations of wage and hour laws. State agencies also randomly audit companies to make sure workers are paid properly. It's hard to fly under the radar for long. |