Even big businesses are vulnerable
The newest ongoing headache for employers is the classification system regarding whether a worker is an employee or an independent contractor. The Department of Labor recently issued some assistance on the misclassification of workers under the Fair Labor Standards Act.
The funny thing about the classification system is: it’s subjective. While different government agencies use different tests to determine a worker’s status, the same worker can get different results from different testing officials regarding their worker status.
This may explain why the Department of Labor issued the clarification: employers face significant liabilities under tax provisions, employee benefit plans, workplace rules, overtime laws, and other employee-related laws if they misclassify an employee as an independent contractor, when in fact they are an employee.
Everyone needs to know the rules, even you
FedEx is the latest company to discover you better know the rules (even if they are a bit subjective), or you’ll be facing a lawsuit. FedEx will be paying $228 million for misclassifying workers. So, how do you know the difference? When is a worker an employee and when are they an independent contractor? According to the Department of Labor, employers must use the “economic realities” test to determine whether a worker is “economically dependent” on the company, or “in business for him or herself.”
What does “economically dependent” mean? This is where things get complicated. According to the new guidelines, almost every worker is an “employee.” Before we begin dissecting the details, you should contact an attorney before creating a hiring policy, as they will be able to guide you more effectively through the process. In the mean time, here’s what you need to know if you want to hire independent contractors:
Tip: if a contractor works FT for you, they’re not a contractor
Try not to use a single contractor too often, even if they’re the best at what they do. If someone works full-time hours, they’re probably not a contractor: they’re an employee. This means benefits, overtime, and everything else that comes with a full-time employee. Be cautious with who your use and how often.
Do your best to ensure your desired freelancer has other clients. This will ensure they are not “financially dependent” on you and you alone. Although, this can be difficult to ascertain, as some freelancers have signed non-disclosure agreements that prevent them from discussing anything else they may be working on and with whom.
The difference between a freelancer and employee
Use freelancers for non-essential jobs; you pay them to complete a project not tasks. Tasks are typically what you pay 9 to 5 employees for, not freelancers and you should pay by the project, not by the hour. This again helps to keep the distinction between independent contractor and employee. Again, this is a bit subjective, but the more defined you make it, the better off you are.