Nearly 20% of jobs in the United States are now some form of non-traditional worker-company relationship, like independent contractor. Independent contractor work is appealing for both the worker and the company. The contractor has the benefit of setting prices, work hours, type of work and completion schedule. It also 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.
Earlier this year, Gov. Tony Evers created a task force to “crack down” on independent contractor misclassification abuse. 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 steps a Wisconsin employer can take to be “safer.”
Do not pay an independent contractor like an employee.
- Do not provide independent contractors with W-2 forms, only with 1099s.
- 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.
- Require independent contractors to submit invoices.
- Do not provide employee benefits or reimburse for expenses or travel to independent contractors.
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. It may be best to only contract with incorporated/LLC independent contractors, not individuals.
- An independent contractor should not have a company title, company business cards, or company email address.
- An independent contractor should not supervise your employees.
- Do not let an independent contractor work at your office unless necessary.
- Do not refer to an independent contractor as an employee or the company as their employer. Do not invite independent contractors to employee meetings or functions.
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 supervise either the independent contractor or their subordinates or provide ongoing instructions on how to do the work.
- Do not provide training to the independent contractor.
- Do not establish working hours.
- Do not require the independent contractor to provide status reports.
- Do not discipline or terminate an independent contractor except as set forth in the written agreement.
- Do not provide formal reviews or performance evaluations to independent contractors.
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.
- The agreement should specify that the worker holds the company harmless for any losses resulting from misclassification and specifies that the worker must re-do poor work.
- Do not give the independent contractor new work after the original project is completed without signing a new agreement.
Remember Bing Crosby – 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. If you are concerned about the independent contractor giving away business secrets to competitors, include confidentiality language in contracts.
- Limit the duration of projects to avoid open-ended relationships.
Sometimes it is what it is.
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 constructors, 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.