When any individual is working for your company, you are faced with the task of classifying that person as an employee or an independent contractor. This classification has implications for both wages and taxes, so it is important to classify every individual correctly. However, thanks to the rise of the “gig economy,” it has become more difficult for businesses to accurately distinguish between employees and independent contractors.
What Is the Gig Economy?
The term “gig economy” refers to the trend of hiring workers to perform a specific, short-term job or “gig.” When workers are hired for gigs, they are usually able to maintain substantial control over the way they work, and most companies classify them as independent contractors. Classifying an individual as an independent contractor is advantageous for these companies, as this exempts them from needing to follow certain wage and hour laws. When you hire an independent contractor, you can also avoid withholding and paying payroll taxes in most cases.
Unfortunately, the distinction between independent contractors and employees can become blurred in many cases. For example, if a business begins working with a specific contractor exclusively and/or for a long period of time, the contractor starts to seem more like an employee.
Why Is Misclassification a Problem?
Employees are entitled to benefits that independent contractors don’t receive. For example, most employees are covered by minimum wage and overtime laws. Employees may also be entitled to other perks, such as health insurance and paid vacation, depending on the situation. Furthermore, a business is typically required to pay employment taxes for each employee based on the amount of wages he or she earns.
In cases where the lines become blurred, someone classified as an independent contractor may decide to file a claim against the company to recover employee benefits or additional wages. Tax consequences may also result.
Avoiding Misclassification in the Gig Economy
To avoid all of the issues that come with misclassifying workers, businesses need to be careful to classify each worker properly. In order to determine whether an individual is an employee or an independent contractor, businesses must consider three different factors: the nature of their relationship with the individual, financial aspects of the arrangement and the business’s level of control over the worker’s activities. For example, if the business has considerable control over how the worker does his or her job and how he or she receives payment, the individual may be classified as an employee.
In many cases, these relationships are not black and white, and making the right call can be difficult. To prevent errors, many businesses choose to consult professionals for assistance. PADGETT BUSINESS SERVICES® can help you determine whether your workers should be classified as independent contractors or employees. We can also assist with payroll, accounting and other important business tasks.