Independent Contractors: Is It Worth the Risk?
April 27, 2011 Leave a comment
The title of this post is not intended to impugn the skill and knowledge of Independent Contractors, but to have you, a business owner, question the risk of misclassifying an employee as an Independent Contractor in an attempt to save some money. It is true, you can save some money by using an Independent Contractor instead of an employee. There are no payroll taxes, no Worker’s Comp/Disability and no overtime. However, the risk you run could cost you a lot more than proceeding in a safe manner.
The first thing you must know is whether someone is an employee or an Independent Contractor. There are different tests employed by different governmental agencies, but they all come down to basically the same thing, how much control you have over the individual. Guess what? If you tell them when to be at your office, what to do and how to do it they are most likely an employee. We discussed the advantages of misclassifying someone as an Independent Contractor now lets discuss the disadvantages.
Lets start with the IRS. You will have to pay all of those back taxes. The IRS will let New York State know. So now you have to deal with the state that means Department of Labor and the Workers Comp Board, at least. Department of Labor will investigate if you paid overtime. Besides the actual overtime, the penalties could cripple your company’s bank accounts. The Department of Labor will then talk to the Workers Comp Board. The penalty for failure to have proper Workers Comp insurance is $2,000.00 for every 10 days per employee. Many, if not all, of these penalties will attach to you personally not just to your company.
You may well ask, how will anyone ever find out? Well your Independent Contractor may get hurt and file for Workers Comp. They are not going to think twice about you if they need to pay medical bills. You may fire the person and they try to file for unemployment. This could trigger an investigation. You may fire them and they contact every possible agency to get back at you. Before you know it trying to save a little bit of money may cost you your business.
If you are going to use an Independent Contractor consult with an attorney or HR Professional to be sure that person will be classified as an Independent Contractor. Keep detailed records of what they are doing for you and how they are doing it and have an Independent Contractor Agreement. Having an Independent Contractor Agreement does not help if the individual is actually an employee, but it is good to be used in conjunction with the other proof of what their employment actually is should it become necessary to prove they are actually an Independent Contractor.
Remember, what may be considered the easier and cheaper option may not be so in the long run. At Sobel Law Offices, P.C. we believe in preventative lawyering. The best way to mitigate legal costs over the life span of your company is to make sure you do everything right in the beginning.