Misclassifying employees as contractors or vice versa may result in costly legal claims and even federal penalties. Understanding how the IRS classifies workers can help businesses categorize their hires correctly.
Avoid these common classification errors when hiring workers.
Classifying off-site employees as contractors
An increasing number of Americans do their jobs from remote work settings such as home offices. However, just working off-site does not qualify an employee as a contractor. Companies must treat telecommuting workers as employees if:
- The company controls the person’s work tasks, methods and projects.
- The company pays for expenses associated with the work (providing a computer and printer for a home office, for example).
- The worker receives a salary or benefits.
While both contractors and employees can receive hourly pay, contractors may instead receive a project-based fee. In addition, some employees do not receive benefits, but contractors never receive benefits.
Relying on industry standards
Some industries, such as transportation, habitually miscategorize employees as contractors. However, common practice in the industry does not provide a defense for misclassification. Hiring managers must use the three-point test above to determine whether a so-called contractor should actually be an employee, regardless of the standards used by competing firms.
Relying on an employment contract
Some employers mistakenly believe that they can classify an employee as a contractor if both parties agree. They point to the employment contract as the defining factor in categorization. However, federal laws prohibit misclassification of workers even if the worker signs this type of contract.
Understanding these categorization factors can help companies avoid expensive sanctions. A misclassified worker has the right to sue for damages.