Independent Contractor: A New Definition?

Independent Contractor: A New Definition?

Who counts as an employee versus an independent contractor may be about to change. A DOL proposal suggests revamping employee classification, reclassifying workers who are economically dependent on a company as employees entitled to more benefits and legal protections.

The DOL has received 12,469 comments on the proposed rule, so the agency may not issue a final rule for a while. But while it’s deciding, the IRS is keeping its stark distinction. You don’t generally have to withhold or pay any taxes on payments to independent contractors, as you do with employees. The Employment Tax Examination Program is a guide the IRS uses as a parameter to examine employers that have a high risk of misclassifying employees.

If you’re a business owner hiring or contracting with other individuals to provide services, consider the following questions, which the IRS currently asks when classifying employees:

  • What degree of control and independence is there in the contractual arrangement? Does your company control or have the right to control what the worker does and how the worker does his or her job?
  • Do you control the business aspects of the worker’s job? This includes considerations such as how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies.
  • Are there written contracts or employee benefits, such as a pension plan and vacation pay, and will the relationship continue? Is the work performed a key aspect of the business?

You need to weigh all factors when determining whether a worker is an independent contractor. The key is to look at your entire relationship and decide the degree or extent of your right to direct and control how he or she works. Document each factor used in coming up with your determination.

New factors?

The proposed rule will likely consider economic factors that accumulate in an investment of work, including scheduling, supervision, price-setting and the ability to work for other employers, asking whether the work is integral to the employer’s business. The new rule may align with the rise of the gig economy and a class of worker who effectively works full time for a company but is still considered an independent contractor. The DOL’s proposed rule could change that, availing these workers of benefits and labor protections under federal law.

The lengthy proposed rule — still a work in progress — is available on the DOL website. In brief, the rule stresses six characteristics the DOL may use in making a determination:

  1. Opportunity for profit or loss depending on managerial skill
  2. Investments by the worker and the employer
  3. Degree of permanence of the work relationship
  4. Nature and degree of control
  5. Extent to which the work performed is an integral part of the employer’s business.
  6. Skill and initiative.

If you want to be sure you’re following the IRS’s current definitions, you can get an official ruling via Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS will review the facts and circumstances and officially determine the worker’s status. It can take up to six months to get an answer, but you’ll feel confident in the determination.

Meanwhile, consult with counsel to make sure not to misclassify an employee. And keep an eye on future changes — we’ll have further communications if and when the rule becomes final.

How To Classify Your Workers

How To Classify Your Workers

When you hire someone to work for you, the worker will likely be considered either an employee or an independent contractor. Usually, you will decide whether you want to onboard an employee or simply hire a contractor prior to advertising for the available position. That way, whoever comes across your job post will know whether they can expect employment or a contract job prior to applying for the position.

Properly classifying your workers is important because misclassification of those who work for you can lead to very impactful tax penalties. Thankfully, these are avoidable as long as you are in compliance with the rules and regulations. Furthermore, you absolutely must comply with requirements regarding tax contributions and how much you withhold in the context of employees, not contractors.

As you seek to accurately classify your workers, you will likely come across the terms exempt and nonexempt, but what do these words mean? And where do they fit into the conversation? Let’s explore the answers to these questions and more.

Exempt vs. nonexempt

Exempt employees are not required to be paid overtime. However, that said, you might decide to offer some form of compensation to exempt employees who work extra hours, which should be well defined within the employee’s benefits package.

On the other hand, nonexempt employees will either receive a predetermined hourly wage or earn an annual salary. From there, nonexempt employees will be entitled to a minimum wage, namely if they earn an hourly wage, as well as overtime pay in situations where they work more than 40 hours per week as determined by the Fair Labor Standards Act. The FLSA is a federal law that not only determines the federal minimum wage but also the requirements for overtime pay and standards.

Information from the FLSA and Department of Labor regarding classification of employees

In the words of the FLSA, all employers are required to pay their nonexempt employees time and a half for every hour the employees work beyond 40 hours per week. Time and a half is calculated based on the employee’s regular pay rate. For instance, if you earn an hourly wage of $15 per hour, then your overtime pay would be $22.50, which is calculated by dividing 15 by two and adding that value to $15.

If you have nonexempt employees who are not paid hourly, then the employee’s hourly rate can still be determined by taking the amount of money your employee earned and dividing it by the total number of hours the employee worked. However, do not include vacation time, official holidays or sick days when you are calculating the employee’s pay.

The DOL has official guidelines regarding who is and is not eligible to receive overtime pay. There are certain situations where employees can be considered exempt.

These include whether your employees are paid an annual salary, whether they earn $684 per week at a minimum, whether they earn at least $35,568 per year and whether they perform the job duties of someone who works in an administrative or executive role. Also, employees who are highly compensated, meaning they earn approximately $107,432 or more per year, are not eligible for overtime in the way that other employees are.

The amount of money an employee earns, whether on an annual or hourly basis, is not the only determining factor when it comes to whether an individual is considered exempt versus nonexempt. Even so, their pay rate can play a role in the context of workplace policies.

If your workers fail to meet the requirements of the FLSA duties test, earn no more than $684 weekly, make less than $35,568 annually or claim specific deductions in regard to their take-home pay, then those employees might be eligible for overtime pay. That said, certain industries, such as agricultural businesses, movie theaters and railroad companies, hire hourly workers who are not entitled to overtime pay.

All your employees, whether they work full or part time, must fill out an IRS-backed Form W-4 and then give it to you as their employer prior to working for you. Independent contractors, on the other hand, must fill out a different form, the W-9.

Now, if you are not sure how to classify any of your workers, take the time to fill out Form SS-8, which is the Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Once you fill it out, send it to the IRS for processing.

You might find it easier to pay your employees on a salaried basis because it ensures that the payroll process is simplified altogether while keeping things consistent. This is because salaried employees receive the same amount of money on a monthly basis no matter how many hours they work per week or month.

In order for an employee to be salaried, they must uphold the duties of their position while also adhering to the requirements set forth by the DOL. At the same time, paying employees an hourly wage instead of a salary can make more sense in certain situations, as hourly workers provide managers with greater flexibility when they sit down to make the schedules every week.

This can be significantly beneficial for job roles that do not necessarily come with the need for consistent schedules. Failing to properly identify exempt employees and classify them differently than your nonexempt employees can affect your business in drastic ways, as can the act of misclassifying workers, even if you do so by accident.

The misclassification of your workers can result in any of the following:

  • Enforcement of proper classification and disciplinary action.
  • Costly fines and business-related penalties.
  • Lawsuits from employees who worked overtime that went unpaid.
  • Responsibility of the costs for remedying the misclassification.

While misclassification is never acceptable, especially when it is intentional, there are instances in which reclassification is necessary. For example, a nonexempt employee might need to be reclassified as an exempt employee or vice versa.

Similarly, you might initially hire someone as a contractor, but as time goes on there might be a conversation about onboarding the contract worker as a long-term employee. Likewise, an exempt employee who is reclassified as a nonexempt employee might perceive the exempt-to-nonexempt transition as a demotion in terms of prestige.

Regardless of the specifics, make sure you explain the law to your employees, especially those who might feel slighted by changes in classification or employment status. Try to stress that the reclassification is in no way indicative of the employee’s performance or any work-related issues so that your employees do not take the change as a personal attack.

Applicant’s Previous Use of Sick Time

Applicant’s Previous Use of Sick Time

Can we ask references about an applicant’s previous use of sick time? We’d like to get a sense of their reliability.

No, you shouldn’t make any inquiries into an applicant’s history of calling in sick. Asking about absences because of illness or injury before extending an offer of employment runs afoul of the Americans with Disabilities Act because it’s likely to elicit information about an applicant’s disability.

Sick leave laws may also come into play. If you’re in a state that requires you to provide sick leave, making adverse employment decisions based on use of protected sick leave use (including deciding not to hire someone) could expose you to liability.

Finally, someone’s past use of sick time is not a good indicator of reliability, particularly when we’ve been experiencing a global pandemic for the last 2.5 years. Asking about this could eliminate great applicants who have had caregiving responsibilities and ultimately have a disparate impact (a legal no-no) on certain protected classes (according to a Kaiser Family Foundation study, 50 percent more women than men reported taking time off work to care for children during COVID-related school closures).

If you still want to consider an applicant’s previous job attendance as a gauge of their reliability, you could ask about their attendance record generally, rather than asking about absences for sickness.

Content courtesy of the HR Support Center – https://affiliatedpayroll.myhrsupportcenter.com

Questions During Recruiting and Interviewing Process

Questions During Recruiting and Interviewing Process

What questions should an employer avoid asking during the recruiting and interview process?

You should avoid questions that are not job-related or that cause an applicant to tell you about their inclusion in a protected class. These would include questions about race, national origin, citizenship status, religious affiliation, disabilities, pregnancy, sexual orientation or gender identity, past illnesses (including use of sick leave or workers’ comp claims), age, genetic information, or military service. You should also avoid asking about things that might be protected by state law (e.g., marital status and political affiliation).

Asking these sorts of questions could result in rejected candidates claiming that the decision not to hire was based on their inclusion in these protected classes rather than job-related considerations. We recommend looking at your state’s protected class list to be sure you don’t run afoul of it.

During an interview, it is advisable to present the candidate with a copy of the job description that lists all essential job functions, including any physical requirements necessary to perform the job, and simply asking the candidate if they are able to perform the job duties listed. For example, if the position requires someone to lift 25 pounds repeatedly throughout the day, you should ask the applicant whether they can lift 25 pounds repeatedly throughout the day. You should not ask whether they have back pain or any other physical issues that might prevent them from lifting 25 pounds or if they’d filed a workers’ comp claim when doing manual labor in the past. If you need someone to work Sunday mornings, you should ask the applicant if they can work Sunday mornings. You should not ask if they attend church or have other commitments that would prevent them from working Sunday mornings.

If a candidate proactively acknowledges a disability or medical condition, we recommend that you refrain from addressing this candidate’s mention of it directly. Instead, confirm that the candidate can perform the essential functions of the position with or without reasonable accommodation. You’ll want to be certain that you are asking this question consistently of all candidates, and not just those who have disclosed a past medical condition or those you suspect may not be able to perform the essential functions of the position. It’s also important not to make assumptions about a candidate’s ability to perform their job based on their having disclosed that they have a disability or other health condition.

Finally, unless a candidate has an obvious disability or has voluntarily disclosed that they have a disability, we would not recommend asking applicants if they would need accommodation to perform job functions as it would have the effect of creating a pre-employment disability inquiry, which is prohibited under the Americans with Disabilities Act (ADA).

Content courtesy of the HR Support Center – https://affiliatedpayroll.myhrsupportcenter.com

What Are Protected Classes?

What Are Protected Classes?

Protected classes — also sometimes called protected characteristics — come from anti-discrimination law. We talk about them with respect to employment laws, but they also come into play in housing and education.

The classes and characteristics protected by federal law include race, color, age (over 40), sex, sexual orientation, gender identity, pregnancy, religion, disability, national origin, ethnic background, genetic information (including that of family members), military service, and citizenship or immigration status.

While you have a lot of leeway to make employment decisions as you see fit, you are prohibited from making decisions based on a person’s inclusion in any of these protected classes. Refusing to hire or promote someone because they are over 40, gay, or from Mexico, for example, would be considered unlawful discrimination under federal law. Many states also have their own anti-discrimination laws that protect additional classes.

The best way to avoid discrimination is to base employment decisions only on factors that are job-related. We recommend including the full list of protected classes in your employee handbook so that everyone is aware of them.

Is This Your Situation: Looking for Qualified Candidates

Is This Your Situation: Looking for Qualified Candidates

Hiring is always stressful. Whether you’re replacing a valued employee or expanding your business, you want your new hire to be the best possible addition to the team. That’s why it’s so frustrating when no one who responds to a job posting fits the desired qualifications. Either the right people aren’t seeing your posting or they are seeing it but aren’t interested. How can you figure out what the problem is and get qualified candidates to respond?

Post in the right places

It’s been a long time since posting a job was as easy as advertising in the local newspaper. Now, most jobseekers look online first. That complicates things for a hiring manager because there are so many job boards out there. Besides posting on the biggest sites, make sure to look into niche job boards for your industry and for your area — unless you’re hiring remotely, in which case you should post on job boards for remote workers.

Brush up your online presence

Even if a jobseeker does read about your position in a print ad, they may still do a search for your name online. That will turn up reviews and articles about your company, your website and your social media pages. A glance at your website should give the candidate a good idea of your company’s culture.

Make sure your job description works in your favor

Although it may seem basic, look over your job description and make sure it includes everything a prospective employee will want to know. That means salary, location, job requirements and qualifications. Otherwise, you risk losing qualified candidates after the first interview. However, your job description shouldn’t read like a form letter or a list of demands. Make the case for applying. Talk about your company culture, including what you do and why, and explain why this is such a good opportunity.

Don’t forget about referrals

Not every employee is hired through “official” channels. Ask other employees in the department whether they can refer anyone they know. You never know who might have a former co-worker who’s looking for a change.

Attracting qualified candidates is always a chore and always includes a generous helping of luck. But by following a few best practices, you can make it likelier that you’ll find your dream candidate. Give us a call to discuss your situation.