It doesn’t happen often, but there are certain questions that come through our HR Hotline that make us say — STOP RIGHT THERE. “We are considering reclassifying all our employees as independent contractors.” “So, my employee, who is an independent contractor, didn’t …” “We would like to bring on a former employee as an independent contractor.” See a theme?

First things first, there is no such thing as an employee who is an independent contractor.  The two are mutually exclusive. A worker is either an employee or an independent contractor. Not both. Next, knowing if a worker is an independent contractor or an employee is an important distinction. There can be consequences for getting it wrong.

The Fair Labor Standards Act (as well as state law) provides minimum wage and overtime protection to certain workers. Classifying workers as independent contractors (IC) when they are actually employees — regardless of the reason — is considered misclassification.  Misclassification is one of the costliest mistakes an employer can make.

Here are some common misunderstandings regarding the employee versus independent contractor distinction:

  1. Receiving a 1099 doesn’t necessarily mean a person meets the criteria of being an independent contractor.
  2. Tax law may consider someone an IC, but the FLSA may consider that worker an employee.
  3. Signing an independent contractor agreement does not make a worker an IC.
  4. Having an LLC, an EIN or providing a scope of work does not make a worker an IC.
  5. Working remotely doesn’t make a worker an IC.
  6. The method of payment (cash, check, “under the table”) does not make a worker an IC.
  7. “It’s common industry practice” is not an excuse for misclassifying a worker as an IC.
  8. Having a worker agree to be paid without taxes (1099 / W9) does not make them an IC.

There a some questions to consider when determining if a worker is an employee or an independent contractor.

  1. Does the worker have more than one client for whom they do similar work?
  2. Is the work performed outside the regular duties or scope of the business?
  3. Is there a set work schedule?
  4. Does the company provide the worker with support staff, email, or reimbursements?
  5. Does the worker have a business license, workers’ compensation insurance, and an office of her own?
  6. Does the worker supervise any employees of the business?
  7. Is the business in questions providing the bulk of the worker’s income?

The answers to these questions gives us a better idea of whether a worker is an employee or an independent contractor. For example, someone who does work for more than one client is more likely to be an independent contractor than an employee. However, someone who has a set work schedule or is provided tools to perform the work required is more likely to be an employee.

Even after reviewing these questions, there can be confusion. Here are a couple of examples to illustrate the distinction:

Case One: A media company provides website creation and SEO to its clients.  They have a client who wants a website built, with logos and branding. The media company outsources the logos and branding to a Graphic Artist. The Graphic Artist provides them with a Scope of Work and a price quote.  The media company approves it and assigns a deadline. The Graphic Artist does similar work for six other clients and has her own business license. When work is complete, she sends an invoice for the job.  In this case, the Graphic Artist is considered an independent contractor.

Case Two: A media company provides website creation and SEO to its clients. They have a Graphic Artist and a SEO developer.  These two workers come to the media office every day and are given tasks to perform.   Neither one has any other clients.  They are expected in the office at 10:00am but can leave when they are finished with the day’s work. They are asked to complete a W-9 in order to receive payment for their services. They are asked to submit their hours spent on projects every week and paid pursuant to those hours. In this scenario, these workers are employees.

Often employers start out by paying all workers as independent contractors. The reason being that it is too expensive to be compliant – at least initially.  Compliance can be costly; there are payroll taxes, workers’ compensation insurance, and unemployment insurance.  There is, however, one other thing that is far more expensive — getting caught willfully (or ignorantly) misclassifying your workers.  In fact, this is such a common error (or mistake) that Nevada passed a law about it during the last legislative session. 

Senate Bill 493 – Misclassification of Independent Contractors (SB493), became effective July 1, 2019.  This bill not only created a task force (meaning, audits and inspections of Nevada businesses) it also prohibits an employer from willfully misclassifying a worker and forcing the worker to agree to be an independent contractor. It also allows for imposing civil penalties on employers who misclassify their workers; $2,500 for the first offense of willful misclassification, $5,000 for subsequent offenses.  

The Labor Commissioner will take complaints from workers claiming they have been improperly classified or willfully misclassified.  Workers who are found to be improperly classified are entitled to recover “lost wages, benefits or other economic damages to make the person whole.” 

The Labor Commissioner and other governmental agencies can go back two years to audit wages and classifications (three years for willful violations under the FLSA).  Fines and penalties are assessed in addition to what is owed in taxes and unemployment. In severe cases, companies can go under due to an inability to pay fines.

The moral of the story is — classify your workers properly.  It’s worth the extra (on average) 20% above wage amount to do it right.