Worker Classification: Consider All Aspects of Your Work Relationship

How to avoid the headaches associated with misclassifying your workers.

The Department of Labor makes a big deal out of businesses who misclassify their workers, whether purposefully or accidentally. The IRS stands ready to penalize and fine those who do so. The act of misclassification can also result in a violation of workers’ compensation laws and a liability for unemployment taxes, along with many other issues.

To help you avoid stepping into this pitfall, we have identified one of the most common mistakes when it comes to employee classification.

One way to determine if a worker is an employee or a subcontractor is by looking at the amount of control the person has over the work that is performed. The IRS considers three main categories to determine independence and amount of control over the worker:

• Financial: The extent the business controls the business aspects of the job done by the worker.
• Behavioral: How much the company controls over how the worker does his job and what he does when he is doing it.
• Type of relationship: This is determined by reviewing details of the relationship including benefits, contracts, type of work performed and duration.

This sounds simple enough – unless you say “yes” to more than one category. Depending on your answers, they could completely change the classification of your worker.

For example, Mickey’s Manicures hires Randy, a local heating and cooling technician to fix their broken air conditioner. The work that Randy does is completely different than the core business at Mickey’s Manicures. Mickey’s also has little control over any behavioral aspects of Randy’s job. He also owns his own equipment and pays for it himself.

The next month, temperatures shift and Randy is called back to check on their heater. Mickey’s pays him each month for his services.

If Mickey’s took in these factors, Randy could be classified as an independent contractor, but if the company only looked at the fact that he came back more than once and received a monthly wage, he could be mistakenly classified as an employee.

Be careful of making easily overlooked errors when evaluating whether your worker should be classified as an employee or contractor.