When you’re using independent contractors instead of employees in your business, there are costly mistakes to avoid in your relationships with them.
For example, you can’t treat an independent contractor the same way you deal with an employee. Because the government can reclassify the worker as an employee. And you will get stuck paying back taxes and penalties.
Plus, you can be liable for unemployment and worker’s compensation claims made by the worker…and additional penalties for failing to contribute to the state funds that pay those claims.
One of the key related issues is control. For instance, if you’re demanding a worker perform from 9 to 5 on Monday through Friday, clock in and out for work, and have the work supervised, chances are you’re setting yourself up for major tax and legal headaches because you’ve got an employee that’s disguised as an independent contractor.
And it gets worse if your actual employees are entitled to benefits (e.g., pension plan participation, paid vacations, health insurance, etc.). Suddenly, you’re on the hook for not providing the worker with these benefits from the start — even if you mistakenly thought in good faith that the worker was an independent contractor.
Now you may be thinking that if the worker is remote (e.g., based in another state), you may be off the hook for misclassifying the worker as a contractor instead of an employee. Yet that’s not the case.
In fact, you may have bigger problems.
Let’s say your contractor “quits” and files for unemployment compensation in the state where the contractor lives. That state may presume the worker is your employee and go after you for not qualifying to do business in that state, failure to pay taxes there, and failing to make contributions on behalf of the worker to the state’s unemployment and workers’ compensation funds.
And, if the worker is located in a place that requires 13-month pay, you can be liable for violating wage laws by not paying the extra month of compensation each year.
These are some common yet expensive mistakes made when using independent contractors instead of employees. And they’re easy to avoid if you use the right written contracts and follow them.
Do you need help with your independent contractor agreements or employment contracts? Then you’ll want to schedule a phone consultation with Business Lawyer Mike Young.
