When companies hire both permanent employees and independent contractors (ICs), properly classifying workers can result in a lot of frustration and confusion. The growth of the gig economy and the rise of borderless hiring has added to the complexity of worker classification decisions, and resulted in new legislation and a number of common misconceptions.
With a number of unwanted legal outcomes at stake, it is important for companies to understand the differences between myth and reality. The following are eight common myths regarding worker classification of which companies should be particularly cautious.
While signing a contract that explicitly outlines the nature of the working relationship between employer and worker is an important step in effectively classifying workers, it is not the sole determinant of worker classification. Unbeknownst to the employer (or the worker), the IC may still be legally considered an employee if the working relationship doesn’t pass state and federal worker classification requirements.
Different regulating bodies may use different tests to determine worker classification. As a result, a worker could be considered an IC under one set of regulations but an employee under another. Companies must ensure they are aware of any compliance requirements that pertain to them, no matter from whom they are issued.
There are a number of reasons why an audit may be initiated, even if the company doesn’t consider itself a likely target. Regulators may want to perform audits based on complaints from workers, applications for workers compensation or unemployment insurance, or even if the company is listed on a 1099 as a sole employer and appears to be paying a full-time income. Simply issuing a particular tax form to an IC doesn’t equate to legally accurate classification, regardless of the nature of the industry or volume of ICs employed.
In truth, common industry practices are of no consequence as far as labor laws are concerned. Despite what may pass as common procedure for classifying workers, every organization is responsible for correctly classifying its workers in accordance with any pertinent regulatory measures.
This is not always the case. Even in scenarios where employer and worker mutually acknowledge the contract-based capacity under which the worker is employed, each state’s unemployment insurance board has the authority to determine whether or not that worker is to be considered an employee under its respective rules.
The IRS places tremendous importance on worker classification, mainly because it affects taxes applicable to earnings. Failing to correctly classify workers, regardless of how well intentioned the company is, can result in unwanted outcomes, so it’s important to ensure all guidelines are strictly adhered to.
Casually engaging workers for small or temporary projects might feel like formal processes and worker classification aren’t necessary, but this could not be further from the truth. In reality, the real-life working conditions of both the employer and worker influence how that worker should be classified, and leaving workers off the books can be perceived as tax evasion.
False. The physical location of duties performed is not a factor in determining worker classification. Remote workers, similar to on-site contract workers, can still be considered employees or contract workers based on the working conditions and other relevant factors.
Understanding common misconceptions around worker classification is an important first step in creating effective long-term compliance success. Companies that are serious about regulatory compliance should consider consulting with a local employment council or partnering with a proven compliance expert. Worker classification policies will assuredly continue to change over time, requiring continuous monitoring in order to avoid misclassification pitfalls.
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