Are you sure your Independent Contractors are classified correctly?Mar 08, 2022
Contractor misclassification is a BIG deal
Misclassification of contractors (who should be W-2 employees) is one of the most common issues we see with our clients here at Expedition HR. If this makes you think – Are my contractors classified correctly? - then this blog is for you. Knowing the difference between Independent Contractors and W-2 Employees will prevent you from finding yourself in a sticky situation!
We will review three major differences between employees and independent contractors. We hope that after reviewing these three differences, you will know right away if you have changes to make.
3 major differences between employees and independent contractors
Recruiting and Hiring
Employee: When you recruit and hire a W-2 employee, they will complete an application and depending on the role, may also be required to send a resume and cover letter. There will also be one or more interviews to select the best candidate for the role. The employer offers the employee a set pay and the employee can choose to negotiate or accept the pay.
Independent contractor: Employers would never ask a contractor to complete a job application. Employers can ask a contractor questions to learn more about their work experience and the projects they can help the employer with, but it would not be a formal interview process, nor referred to as “interviews.” Contractors propose their own pay and typically send a contract to the employer for the set scope of work.
Employee: Schedules are set by the employer for the employee. Employees are accepting this set schedule when they accept the job they are offered.
Independent contractor: Contractors have control over when and how much they work to meet the agreed upon scope of work. A company can’t require a contractor to be available on certain days or during specific times. The contractor sets their schedule according to their project they need to complete.
Level of Supervision
Employee: Employers manage an employee’s work. They have the right to check in whenever they have questions or to redirect/change the employee’s work. Employees are given instructions and guidelines in the form of a job description and work tasks which shape how to do the job. They are assigned specific goals and projects to complete and must periodically update their employer on the status. Employees generally do not have the freedom to perform work tasks of their choosing, rather they must perform the tasks that relate to their job, unless they receive special permission to go outside the job description. Employees typically have their work measured through regular performance reviews.
Independent contractor: Employers do not/should not direct the work of a contractor. There should be no level of supervision over the contractor. The contractor initially proposes a scope of work based on the client’s need, and the client then lets the contractor lead the work projects. The employer also should not control the details of the execution of a contractor’s project and what tools/equipment they use. Contractors should no receive performance reviews or have a person designated as their “work supervisor.”
So why is this classification so important to take seriously, anyway?
We'll tell you! Classifying an employee as an independent contractor with no basis for doing so makes employers liable for seeing as evading payroll taxes – definitely a sticky situation. This misclassification can create a “flag” with the IRS and can result in fines and penalties. If you classify someone as a contractor, you want to be absolutely sure they fit the criteria. Seek HR or legal counsel if you are unsure.
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