Are you misclassifying your employees? If you have subcontractors or independent contractors working for you, you may want to make sure they aren’t really employees wearing independent contractor labels, because misclassifying employees can mean big trouble for your business. If an independent contractor working for you feels they have been misclassified, the results could be a lawsuit that finds you owing back taxes, unpaid benefits, and overtime wages.
It doesn’t matter what your contract or written agreement with your subcontractors says, here are seven signs that your sub may actually be an employee.
- You supervise the work, which must be done exactly per protocol.
- You provide the tools, equipment, and training to get the job done.
- Your contractor only works for your company, and has no work outside of your projects.
- You and your contractor have been working together for years, with no end date in sight.
- You set the working hours and days.
- Your contractor receives an hourly pay.
- The work provided by your contractor is an integral part of your business.
If more than one of these signs describes your relationship with your subcontractors, watch out! You may actually have a misclassified employee working for you. And you are definitely going to want to keep reading...
Contractor vs Employee: What the Government has to say
Trying to determine the employee-contractor relationship can be tricky, and even the IRS and Department of Labor will tell you there are different factors to consider here.
According to the IRS, the facts that determine the degree of independence with your contractors fall into three categories: behavioral, financial, and relationship factors.
An employer will generally determine the working behavior of an employee. That means telling an employee where, when, and how to do their work. Instructions given to an employee could include
- When and where to do the work
- What tools and equipment to use
- Where to purchase supplies
- What sequence or order to follow while doing work
The more detailed the instructions you give on how the work should be done, the more likely your worker is an employee. Less detailed instruction on exactly how to complete a task, and more control given to the worker, is a sign of an independent contractor.
A real subcontractor will be given a job to do, and will have control over when and how the job gets done.
Employees and independent contractors will have different financial considerations. An employee is typically paid on an hourly basis, while a contractor generally will be paid per project or a flat fee. This “method of payment” is not the only financial consideration, however. Your subcontractor may bill you hourly and still not be an employee.
Another financial consideration is the worker’s investment in the equipment needed to complete the job. Independent contractors will often times have a significant investment in the equipment they use, and an employee’s equipment is generally provided to him. This is another gray area, because your workers may have invested a good deal of their own money on tools that they use on a construction job, but still be an employee and not an independent contractor.
What’s not gray is the financial consideration of “economic dependence.” According to the Department of Labor, economic dependence is one of the largest factors determining if a worker is an employee or contractor. “If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.”
If you have a subcontractor who does work for you, but also works on other projects outside of your projects for other general contractors, that is an independent contractor who is in business for himself. But if your subcontractor only works on your projects and is economically dependent on you, he is most likely a misclassified employee.
The final factors that determine an employee vs contractor classification have to do with the relationship between you and your worker.
If a worker provides work that is a key element of your business, they may be an employee. According to the Department of Labor, “If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer... Work can be integral to a business even if the work is just one component of the business and/or is performed by hundreds or thousands of other workers.”
If you frame residential homes, the work of a carpenter is integral to your business. That means your carpenter is more likely to be an employee. If you contract with a software company, however, to create bid tracking software, that work is not integral to your business. That signifies an independent contractor relationship, instead.
Another consideration between you and your worker is the permanence of your relationship. A true independent contractor may work with you for specific projects or a period of time. According to the IRS, if you hire a worker with the expectation that the relationship may continue indefinitely, you may have an employee on your hands.
If your worker has only done work for you for a number of years, and you expect them to continue to only work with you indefinitely, that is an employee relationship. However, if your worker has done work with many other contractors over the years, negotiates rates for each project with you, and is able to turn down work for any reason, this signifies an independent contractor.
The Insurance Problems of Misclassifying Employees
Your insurance policy has very clear guidelines about how you should classify those working for you, the insurance they will need to carry, and how your insurance will protect you in the case of a mishap. Your general liability policy probably has a subcontractor coverage exclusion stating that the work subs perform is their own. That means their work may not be covered under your policy. So if you are using subcontractors, they will need their own general liability policy.
Similarly with workers’ compensation insurance, carriers care very much about the role the individual has in your company. If you have actual employees that are being treated like subcontractors, you could be facing audits, hefty bills from your workers’ comp carrier, or even fraud allegations if you don’t include their payroll in your totals.
Why you should care about subcontractor and employee misclassification
Employee misclassification is a top priority for the Labor Department, because misclassified employees aren’t covered by unemployment insurance, workers’ compensation insurance, and other workplace regulations such as overtime pay. If you have been trying to cut corners and save on insurance, taxes, and other employee costs by contracting with workers as “independent contractors,” you need to be sure you are doing so legally.
Your construction business is at risk for a lawsuit if you are misclassifying employees, and that can cost you big time in the long run. A written contract won’t protect you if your worker is actually an employee, so make sure you have considered all of the factors involved with your workers to make sure you aren’t giving an actual (misclassified) employee a raw deal.