To prepare an effective agreement on independent contractors, it is important to understand the relevant tests used to classify the worker as an independent contractor. There are certain provisions that you would like to include in your agreement with an independent contractor so that there is no question that the person is an independent contractor. Critically, there are also exclusion provisions that would generally speak in favour of determining that the person is an employee. If your main reason for classifying your employees as independent contractors is not the way they work, but because you want to have lower costs, you need to ask yourself if you are willing to risk your business in exchange for the potential for cost savings. Because that`s what you do. Independent contractors are considered self-employed, so businesses that use independent contractors do not have to pay payroll tax on their contractors. Instead, entrepreneurs have to pay taxes for the self-employed. In addition to reducing a company`s tax liability, the use of independent contractors reduces overhead costs caused by administrative obligations, regulatory compliance and performance programs. A common problem that many companies face is whether employees are properly classified as independent contractors rather than employees. These problems stem from the various standards applied by government agencies and courts to determine whether an employee should be considered an independent contractor or an employee. According to the Internal Revenue Service, a company typically has to withhold income taxes, withhold and pay taxes on Social Security and Medicare, and pay unemployment tax on wages paid to an employee. However, these requirements generally do not apply to independent contractors.
In addition, courts and government agencies such as the Internal Revenue Service, the Washington Department of Labor and Industry, and the Equal Employment Opportunity Commission apply different tests to determine whether an employee is an independent contractor or an employee. According to the U.S. Department of Labor, “the plethora of tests that define independent contractor status, enforced in all federal and state laws, allows an employee to be classified as an independent contractor under one law, but an employee under another.” The following describes various tests that determine whether an employee is an independent contractor or an employee. Washington businesses, especially small ones, are often tempted to classify workers as independent contractors rather than employees. You may be drawn to entrepreneurs for a number of reasons, but the most common reasons are: As it should be clear now, one of the main reasons employers often want to hire contractors is to avoid paying payroll taxes. But, of course, federal and Washington state agencies want to collect labor taxes from employers and enforce labor standards. If these things don`t concern you, and if you`re willing to give up control, then maybe independent contractors are for you. Let`s take the example of Uber.
Although Uber has corporate employees, the majority of its workforce – drivers – are classified as independent contractors. Since Uber can`t exert too much control over how its drivers operate, as a passenger, you never really know what kind of Uber experience you`ll get. This could include a smooth ride in a new car with bottled water on offer, or it could include a jerky ride in August without air conditioning. You need to understand the pros and cons of using independent contractors before you increase your workforce. The decisions you make have lasting consequences for your business. Many workers, in fact, operate as independent contractors and should be classified that way. However, if you have doubts about whether your employees will function as employees or contractors, consider the existential threat to your business from the potential consequences of misclassification, rather than focusing on the short-term savings you could make by hiring independent contractors. Most importantly, you should work with an employment lawyer to assess the risks and opportunities of structuring your workforce with contractors or independent employees. Uber may not be the best comparison for your business, but it`s useful for pointing out the difference in the type of business you can create with independent contractors compared to employees.
On the other hand, if you let the worker do the job the way you want and you are only interested in achieving a certain result, you have little control over the worker`s behavior and are therefore more likely to deal with an independent contractor, although there are still many other factors that need to be taken into account. Duration: The agreement must specify a duration for the agreement. An assignment limited to a short duration or ending after the end of the project usually implies an entrepreneur status. Costs: The agreement should stipulate that the independent contractor is responsible for the costs and materials incurred to provide the services. These costs do not have to be reimbursed by the company. Otherwise, it could indicate that the person is an employee. A worker who does more than a personal job will complete one of the two statements of the personal work test below. If your employee fails this test, use the 6- or 7-part test described in the next tab to determine if they are exempt from workers` compensation. Type of remuneration: The company must carefully choose a payment method that is different from the payment of the company`s employees. For example, if employees are paid by the hour or monthly, the independent contractor may be paid based on the completion of the service. The agreement should stipulate that the contractor is not entitled to overtime pay. As the various tests show, there is no specific factor that determines whether the employee is an independent contractor or an employee.
Companies that classify their employees as independent contractors should carefully review existing relationships and agreements to ensure that workers are properly classified and, where appropriate, make changes to relationships and agreements to support this classification. Obligations: While the agreement must specify the services to be provided, it must not control how the contractor will work. Contractors should not have a fixed schedule and generally have the freedom to choose their own times and how they complete the work. What you call your employees doesn`t determine their status as contractors or employees – that`s how you treat them. This means that the IRS, DOL, DOR, and the rest of the investigative agencies will look at how you behave in relation to the employee, rather than taking your word (or the words of a contract) for it. This prompts Washington`s federal and state agencies — such as the IRS, the Department of Labor (“DOL”) and the DOR, to name a few — to aggressively monitor the line between employees and contractors. And they have an arsenal of enforcement mechanisms, including the imposition of payment obligations of the following: This complexity is compounded by the fact that different state and federal agencies use different tests to determine contractor status, meaning that a worker could be classified as an independent contractor under one test and an employee under another. A handful of the different tests are listed below: Almost every business in Washington State will face a choice between independent contractors and employees when staffing their workforce.
Or, more specifically, Washington companies are faced with the choice of classifying their workers as independent contractors or employees. Washington courts apply the agency`s restatement test to common law claims. Simply calling a worker an “independent contractor” or a “consultant” does not make this true. Even if it is in a written contract. So don`t think you can just find a free independent contractor agreement, have your employee sign, and then be exempt from any obligation you would have to an employee. Note: The National Employment Law Project estimates that it costs about 30% less to hire an independent contractor than to hire an employee. [Source] This is different from an employee who is usually hired continuously to perform a variety of different tasks and is paid based on time steps. Employees and contractors also differ in that the employee is subject to monitoring and control over how they perform the work, whereas the contractor usually has the freedom to determine how the task is performed. Think of lawyers as an example that illustrates this difference. If you`re a small business, you`re probably working with a lawyer on discrete projects, such as forming an LLC or applying for trademark registration.
However, you are just one of many other clients of this lawyer. In this environment, the lawyer functions as an independent contractor. But if you are a very large company and you have an in-house lawyer who provides ongoing legal services only for your business, the lawyer functions as an employee. Training: The agreement should stipulate that no training will be provided to the independent contractor. The more instruction and training provided to the employee, the more likely the relationship is to indicate that the person is an employee. .