Can I hire any worker as an independent contractor?
Hiring independent contractors instead of employees in Colorado. Know the law and make the right decision.
Can I hire any worker as an independent contractor?
The short answer, no.
Hiring workers as independent contractors frees businesses from the legal responsibilities associated with employees, like tax and employment law requirements. However, not all workers can be legally hired as independent contractors, and there are significant penalties for improperly classifying workers.
What’s the problem?
For business owners, improperly classifying a worker as an independent contractor can result in significant back taxes, penalties, and interest. Properly classifying workers can mean the difference between surviving the headache of an audit, or being hit with large back taxes, penalties, and interest.
What’s the Real Risk?
The IRS and Colorado take the misclassification of workers seriously because it results in significant tax revenue loss. For instance, in 2006 employer misclassification cost the federal government approximately $2.72 billion. Additionally, misclassification deprives workers of rights otherwise available to them as employees, and the government generally aims to protect employee rights.
How are Businesses Selected for Audits?
Usually, taxpayers are randomly selected and have included large, midsize, and small business employers, as well as nonprofit organizations. Commonly, independent contractors will file for unemployment insurance thereby initiating a government inquiry to determine if the worker was misclassified and deserving of unemployment insurance. When this happens, business owners must respond to government questions, pay required back taxes, and may be required to attend unemployment insurance court proceedings before an administrative law judge.
The Test: Employee or Independent Contractor?
The government has made clear that there is no concrete formula to determine who is an independent contract and who is not. Instead, the decision is made on a fact specific, case by case basis. This method is frustrating for business owners because it does not provide clear guidance.
However, the CONTROL test is one way to get clarity. Generally, the degree of control you exercise over a worker determines if they are an employee or an independent contractor. The general rule of thumb is that a worker is an employee if you control the details of how the work or services are performed. In contrast, an independent contractor controls how they will accomplish the work, and you simply dictate the desired result or product.
The IRS and the state of Colorado have provided their agents with multiple factors to help them assess the level of control exerted over a worker.
Factors that point towards control and employee status
- Controlling the details and means by which the work is performed.
- Instructions regarding when or where to work.
- Instructions regarding what tools or equipment to use.
- Providing the equipment and materials necessary to perform the work.
- The term of work is expected to continue indefinitely, rather than for a specific project or period.
- Controlling whether the worker can hire people to perform the work.
- Instructions regarding the order or sequence of the work.
- Providing training to teach the worker how to perform the work.
- Worker is not providing her services to any other businesses.
- Worker is not free to seek out other business opportunities and provide the same services to other businesses.
- Worker does not have a significant financial investment in the tools or equipment used to perform the work.
- Worker does not have significant unreimbursed business expenses.
- Worker provides services that are a key aspect of your regular business activity.
- Worker does not advertise her services or maintain a visible business location.
- Worker does not have fixed ongoing business costs that are incurred regardless of whether or not she works for you.
The importance of each factor varies depending on the type of work and the factual context. Not all the factors need to be present in any given situation, and no single factor is a sole determinant. Ultimately, the IRS and Colorado direct their agents to focus on the overall situation.
Examples- Employees v. Independent Contractors
The Plumber- Independent Contractor
A plumber is a classic example of someone being hired as an independent contractor instead of an employee. You hire a plumber to fix a leak at your office, you do not provide the tools for the plumber to do the job. You and the plumber are not in the same business. The plumber provides an invoice when the work is done.
The Secretary- Employee
Kim works as a Secretary for ABC Company on a part-time basis. Kim is paid hourly. ABC supplies a computer, a phone, an email address, and all necessary tools and materials for Kim to perform the work. Kim works 9 am – 1 pm, Monday through Friday. Kim signed a contract that says “I am not an employee of ABC. I am an independent contractor of ABC.” Kim does not work for anyone else, and does not advertise her secretarial services to anyone else. Kim is an employee.
Auto Repair Worker- Employee
Chris performs auto repair services for the repair department of a car dealership. He works regular hours and is paid on a percentage basis. He has no investment in the repair department. The company supplies all facilities, repair parts, and supplies; issues instructions on the amounts to be charged, parts to be used, and the time for completion of each job; and checks all estimates and repair orders. Chris is an employee of the company.
Avoid Common Misassumptions
A company should not assume it is safe to accurately classify a worker as an independent contractor simply because:
- The worker wanted, or asked, to be treated as an independent contractor.
- The worker signed a contract stating she is an independent contractor.
- The worker does assignments sporadically, inconsistently, or is on call.
- The worker is paid commission only.
- The worker does assignments for more than one company.
Lenz Law has helped many business owners navigate the hiring process. If you have questions related to independent contractors or employment law, we’d love to hear from you.