Tuesday, August 9, 2011

Employee vs. Independent Contractor

Do I have to pay Workers Comp if they are properly classified as a 1099?

As most business owners know, they can hire people in two ways, either as an independent contractor (otherwise known as a 1099) or as an employee.

Employers oftentimes improperly classify their employees as independent contractors for financial benefits such as dodging payroll taxes, avoiding minimum wage requirements, overtime, or rest break rules, and by avoiding reimbursing expenses for performing certain jobs. One of the most common reasons employers label a worker as an Independent Contractor instead of an employee is to avoid covering an employee under “workers’ compensation insurance”. How a worker is classified determines the employer’s responsibility under the Fair Labor Standards Act. Due to the rising misuse of classifying workers as independent contractors, the IRS has stepped up the enforcement of the Fair Labor Standards Act and have developed a 20 point test to determine an employment relationship vs. an independent contractor relationship. Follow this link to review the 20 factors on how to evaluate your worker and their classification.

There is no set definition of the term “independent contractor” but here are some points that might help you distinguish what type of worker you have:
-       Independent Contractors are considered to be self-employed and subject to “self employment taxes.”
-       Independent Contractors control the manner and means by which contracted services, products, or results are achieved. The more control a company has over an employee and how their work is performed, the more likely the workers are employees, not independent contractors.

Here are some factors to consider when comparing a 1099 to an employee (given from the Department of Industrial Relations):
1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal
2. Whether or not the work is a part of the regular business of the principal/alleged employer
3. Whether the principal or the worker supplies the instrumentality, tools, and the work space
4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers
5. Whether the service rendered requires a special skill
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision
7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill
8. The length of time for which the services are to be performed
9. The degree of permanence of the working relationship
10. The method of payment, whether by time or by the job

Do I owe workers compensation premium on independent contractors?

This question can be answered on a case by case basis; it depends on the situation of the worker’s employment and the job that is being performed.

Most carriers will ask for proof of workers compensation from the independent contractor. If the 1099 does not have any employees then they are not required to have workers compensation insurance. In that case the carrier will ask for proof of payment or paycheck stubs from two or more other sources of income.  If you have provided proper documentation and both the IRS and your insurance carrier deems your worker as an independent contractor then that worker does not need to be included on your workers compensation coverage.

Be sure to check with an insurance broker on how your current workers compensation carrier classifies independent contractors. If your carrier deems your 1099 as an employee, they will bill you premium on every cent you paid to the worker for the length the policy was active.

Here is another web site to help guide you in the right direction.

Or if you have any further questions and would like to speak with someone directly, contact us at (818) 735-7600.