Business Owners Need to Classify Workers Correctly

Most businesses in California need to hire workers at some point. When choosing who to hire, employers may want to consider the type of work they need done and for how long.

For shorter projects, sometimes an independent contractor is the better choice, while for steady work, an employee may be the way to go. Whatever owners decide, they must classify and treat each appropriately or face stiff financial consequences.

Independent Contractors

According to the IRS, it is best to use three categories – financial control, behavioral control and relationship – to classify workers. In general, an employer has a lot less control over an independent contractor. An IC can choose the hours and days to work, can complete a job however he or she wants and can work for multiple companies at one time. As for their own responsibility, independent contractors must provide and pay for supplies, equipment and expenses. They also are responsible for their own taxes and they are not eligible for benefits such as vacation pay, retirement, health insurance and workers’ compensation.

Employees

An employer has more control over the employee in terms of hours, training, instruction etc. However, an employer also provides a number of benefits for each employee, but one benefit of hiring employees is they are typically more loyal than ICs and they stick around longer.

Cost Considerations

According to the Chron, hiring independent contractors typically save businesses up to 30%. It is also beneficial to employers in that they do not have to follow the same wage and hour laws for ICs as they do for employees. However, misclassifying workers can cost employers a lot. If found guilty, they must pay the government for back unemployment and payroll taxes as well as interest and penalties.