Five ways to ensure the firms you hire are independent contractors

A PREVIEW OF THE SEPTEMBER/OCTOBER ISSUE OF THE WISCONSIN MERIT SHOP CONTRACTOR MAGAZINE

By John Schulze, ABC of Wisconsin Director of Legal and Government Affairs

Nearly 20% of jobs in the United States are now some form of non-traditional worker-company relationship, like independent contractor. Independent contractor work can be appealing for both the worker and the company. The worker has the benefit of setting prices, work hours, type of work and completion schedule. The company has the freedom and flexibility to staff to meet their needs and reduce training time and costs.  Misclassification occurs when an employer either accidentally or intentionally defines an employee as an independent contractor rather than as an employee. If the person doing the work fits the definition of an employee, the company is required to treat them as an employee, even if they would prefer to be an independent contractor.

The risks of even accidental misclassification can expose a company to retroactive wage and benefit payments, taxes with interest, monetary penalties and legal defense fees. Unfortunately, there is no single test to evaluate whether a worker is an independent contractor. A Wisconsin employer has as many as five different tests to apply, and each has different requirements and weighs different factors. For example, a company could face a scenario where a worker is an independent contractor for federal income tax purposes but an employee under Wisconsin workers compensation laws.

The difference between an independent contractor and employee is complicated and crucial, so it is important to consult an attorney to address your specific situation. Regardless, there are several steps you can take as a contractor to ensure you are not engaging in this misclassification issue:

  1. Do not pay an independent contractor like an employee. Pay by task or project, not hourly or weekly or on specific dates or regular amounts. A flat fee payment arrangement makes it more likely that a worker is an independent contractor.
  2. An independent contractor should not look like an employee. The independent contractor should not hold themselves out as a company employee. Have an independent contractor provide proof that they are running an independent business, such as corporate formation documents, business website, any advertising, or professional licenses.
  3. Do not train and supervise the independent contractor like an employee. A defining trait of an independent contractor is that they have specialized knowledge or experience needed for a specific project that can be completed without direction. Do not discipline or terminate an independent contractor except as set forth in the written agreement.
  4. Put it in writing. It does not matter that the written agreement between the person doing the work and the company states that the worker is an independent contractor or a freelancer. The written agreement needs to spell out that the independent contractor is responsible for their own expenses, taxes, liability insurance, licenses, and quality of work.
  5. Don’t fence your independent contractors in. Employees generally work for one employer, but independent contractors provide services to the general public. Do not restrict your independent contractor from working for other companies. Avoid giving your independent contractor so much work or such short deadlines that they are working full-time for your company.

 All the tests focus on two issues: Direction/control and whether the worker has an independently established business. If you are telling a worker what to do, and/or the worker only works for you and no other contractors, then the worker is an employee, not an independent contractor. There are going to be times when a company cannot keep direction to a minimum, cannot let a worker come and go as they please and cannot allow them to work for other companies. When that is the case, the company needs to treat the worker as an employee, not an independent contractor.

An expanded version of this article will be available to members in the Sept./Oct. issue of the Wisconsin Merit Shop Contractor magazine. 

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