For both tax and legal purposes, it is vital that you classify your workers correctly. A business may hire both employees and independent contractors, but misclassifying workers can lead to significant penalties.
How to Classify Workers
There is no single factor that determines if an individual is an employee or an independent contractor. The IRS says you must take the following elements into consideration:
Businesses have the right to control when and where employees work, as well as how their work is performed. Independent contractors use their own work methods and set their own schedules.
Employees are paid an hourly wage or a salary even when supplemented by a commission. Independent contractors have an opportunity for profit or loss and are often paid a flat fee.
Relationship of the parties.
Employees have benefits such as insurance, paid vacation, sick leave, and a retirement plan. Their relationship is considered indefinite as opposed to for a specific project or period. Independent contractors have no benefits provided by a business and are typically hired for a particular timeframe.
Employers are required by law to withhold income tax and pay Social Security, Medicare taxes, and unemployment tax on wages paid to their employees, while independent contractors pay self-employment taxes on their own wages. Workers classified as employees are also entitled to paid breaks, potential overtime pay, and other protections not given to independent contractors. An experienced business attorney can help you determine if your workers are being classified correctly and explain what your obligations will be if your workers are considered employees.
Consequences of Misclassification
Misclassifying workers can result in a wide range of negative consequences for your business. These include:
- Penalties for failing to pay overtime and minimum wage under the Federal Fair Labor Standards Act (FLSA) as well as under state wage laws
- Fines and penalties resulting from an audit
- Potential criminal and civil penalties
- Class action lawsuits filed by groups of misclassified workers
- Payment of overdue employee benefits such as overtime, PTO, and rest break time for workers who must be reclassified as employees
- Widespread damage to your company’s professional reputation
Do You Need an Experienced Business Law and Succession Planning Attorney?
If you need to speak with an experienced business law and succession planning lawyer, please feel free to contact us online, or call our Virginia Beach office to schedule your free consultation. We have offices throughout Virginia, including Chesapeake, Newport News, Norfolk, and Suffolk, as well as northeastern North Carolina.