Employee or independent contractor? That's the million-dollar question-literally-facing many employers these days: As we continue to manage through the web of employee relations, the one question that is often is “why can’t they be an independent contractor”?  Employers now more than ever want to make employees independent contractors.  Why?

According to the California Department of Industrial Relations, Not all workers are employees as they may be volunteers or independent contractors. Employers oftentimes improperly classify their employees as independent contractors so that they, the employer, do not have to pay payroll taxes, the minimum wage or overtime, comply with other wage and hour law requirements such as providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in performing their jobs. Additionally, employers do not have to cover independent contractors under workers’ compensation insurance, and are not liable for payments under unemployment insurance, disability insurance, or social security.

The state agencies most involved with the determination of independent contractor status are the Employment Development Department (EDD), which is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE), which is concerned with whether the wage, hour and workers’ compensation insurance laws apply. There are other agencies, such as the Franchise Tax Board (FTB), Division of Workers’ Compensation (DWC), and the Contractors State Licensing Board (CSLB), that also have regulations or requirements concerning independent contractors. Since different laws may be involved in a particular situation such as a termination of employment, it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law. Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, each working relationship should be thoroughly researched and analyzed before it is established.

Classifying workers as contractors can be very tricky - especially since the IRS, the Fair Labor Standards Act (FLSA), Title VII, and state-level regulations all define "contractors" in different ways. U.S. Labor and Treasury regulators just announced a huge new enforcement campaign this year, hiring more inspectors and giving grants to states to pursue employers that misclassify contractors.

If you incorrectly designate an employee as a contractor (even if it's an honest mistake), you'll face costly penalties and back-tax claims.  So as you can see there is severe liability for misclassifying your employees. If you are asking yourself any of the following questions? Then I would caution you not to make any classifications changes until you are for sure.

-  How to avoid the biggest mistakes employers make with contractors, as well as drafting effective contractor agreements and protecting yourself from lawsuits and audits. Is the question that is puzzling employers? 

-  The most current federal and state tests used to determine whether a worker is an employee or an independent contractor.

-  What types of workers cause the most confusion with classification, from construction and franchise personnel to trainees and home-based staffers? 

-  The "red flags" you should look for when you conduct a self-audit to identify potential contractor problems 

-  The safest ways to correct contractor misclassifications (without triggering a legal claim in the process) 

-  How to create bulletproof contractor agreements that will survive in state and federal courts 

-  What steps you should follow to sever your relationship with any contractor 

-  Best practices for dealing with special contractor issues such as workers' compensation claims and the use of temporary employees.

If you have asked yourself any of these questions, you could be headed down a Misclassification nightmare.  Before you decide to change classification on any employee, contact Poindexter Consulting Group, Inc. for a free analysis.  Visit PCG on the web at www.pcghr.net or (951-926-9069)