The next tip for those who own, or want to own, a small business: do not misclassify employees as independent contractors. The reason that many small business owners want their workers to be independent contractors is because independent contractors are not covered by employment, labor, and related tax laws. Therefore, a new business owner might be tempted to misclassify employees as independent contractors in order to avoid paying payroll taxes, benefits, and other liability. Before you make this determination, you should do a careful analysis of many factors including:
- the type of work the worker is performing
- whether the worker is supervising your employees
- whether the worker has his/her own tools and equipment to perform the work
- how much control you have over the worker (such as who sets the work hours and the pay rate)
- whether the worker has his/her own insurance
- whether the worker works for other companies or just for yours
- whether the worker advertises his /her services separately
The above is not an exhaustive list, but demonstrates that this issue is not a simple one. For instance, typically, independent contractors sign an independent contractor agreement which details the terms of the relationship between the company and the independent contractor. But, do not fall into the trap of thinking that if you have a worker sign an independent contractor agreement, than that automatically makes the worker an independent contractor. If you are being investigated by a government agency, the independent contractor agreement might be one factor that is considered, but it will be unlikely to cut short the investigation and end the inquiry altogether.
Also, consider this: if an employer fails to pay wages owed to an “employee”, that employer could liable under Arizona law for three times the unpaid wages. If a court or government agency found that your business had misclassified an employee as an independent contractor and failed to pay wages properly, you could face other penalties as well including penalties related to the employment taxes you should have been paying all along. There are other issues to consider as well such as immigration and worker’s compensation coverage.
My grandma used to say: “begin as you mean to go on”. She was a wise lady because that is not only good life advice, but good business advice. Whether you own an existing business or are starting a new one, it is wise to make sure you classify your workers properly. And, if you already have an ongoing business and think you might have misclassified your workers, you are better off making efforts to correct your mistake now rather than letting the problem linger which could lead to bigger problems down the road. At Hymson Goldstein & Pantiliat, PLLC we have experienced employment law attorneys who can assist you and guide you to avoid these legal pitfalls.
The information contained herein is general information not legal advice, and does NOT establish an attorney-client relationship with Lori Brown.