Easiest Way To Know If Someone Is An Employee
Misclassifying employees can lead to financial blow
Posted on 01-19-2022, Read Time: Min
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Uber. FedEx. DoorDash. Lyft.
There’s one thing those companies have in common, and it’s not just that they all involve driving things around: They’ve been the target of major lawsuits alleging the misclassification of employees as contractors.
The problem these companies are facing? It’s illegal to misclassify contractors as employees (and the other way around). In other words, if you hire someone as a contractor but expect them to fulfill the duties of an employee, you’re in trouble. It’s not just Uber and Lyft, though. Millions of companies are breaking the law every single day with employee misclassification.
In general, there are two reasons why misclassification happens:
- A company is intentionally (and illegally) trying to avoid payroll taxes, benefits, and the other legal bits that come with official employment.
- A company truly doesn’t realize that they’re misclassifying their people.
The catch? Classifying people as employees or contractors isn’t as intuitive as you might think. Some of the rules are very specific, and you’ll need to know them if you’re paying people to work for you.
The Easiest Way to Know if Someone Is an Employee
There are plenty of checklists you can run through to figure out if someone is a contractor or an employee. But first, ask yourself a simple question: Do I get to control when, where, and how my employees get work done? If your answer is yes, you’re probably thinking about an employee.
If you hire a contractor, you legally only get to control the result of the work––not the process to get there. If you hire a contractor, you cannot:
If you hire a contractor, you legally only get to control the result of the work––not the process to get there. If you hire a contractor, you cannot:
- Schedule specific hours for them
- Control the software and products they use to do their work
- Prevent them from working with other companies
- Provide them benefits (like insurance and vacation plans)
- Control how, when, and where they’re paid
The Most Common Mistakes That Employers Make
Some parts of employee classification are more confusing than others. Below are the three easiest mistakes to make when hiring people.
1. Making contractors work specific hours. By law, you can’t tell contractors when they have to work. You can agree on deadlines and deliverables, but you can’t tell them how long they have to work––or when. All you get to control is the result.
2. Controlling the payment timing and method. Contractors get to choose their own payment methods, and they can stipulate when you have to pay them. If you ask a contractor to use your company’s internal system and receive payments on your own schedule, that contractor should be an employee.
3. You ask the person to work on specific tools. Contractors get to choose the tools they use to get work done. Imagine you hire a designer and you want them to deliver the work via InDesign. If you require them to do this, that designer needs to be an employee.
There are plenty of other mistakes. But, these are the three that are easiest to make.
1. Making contractors work specific hours. By law, you can’t tell contractors when they have to work. You can agree on deadlines and deliverables, but you can’t tell them how long they have to work––or when. All you get to control is the result.
2. Controlling the payment timing and method. Contractors get to choose their own payment methods, and they can stipulate when you have to pay them. If you ask a contractor to use your company’s internal system and receive payments on your own schedule, that contractor should be an employee.
3. You ask the person to work on specific tools. Contractors get to choose the tools they use to get work done. Imagine you hire a designer and you want them to deliver the work via InDesign. If you require them to do this, that designer needs to be an employee.
There are plenty of other mistakes. But, these are the three that are easiest to make.
Here’s What Happens if You Misclassify a Worker
When companies misclassify workers on purpose, they do it to avoid taxes. So, if you get caught misclassifying (whether you meant to or not), you’ll have lots of back taxes to pay to the government. This includes both federal and state taxes. There are also civil penalties for the violation––so in addition to paying back taxes, you’ll also have to pay tens of thousands in fees.
Before you make a hire, double-check that you’re not breaking any rules. It’s easier than ever to hire employees now, including across borders, so there’s no reason to cop out and hire contractors illegally.
Note: This article references the legal situation in the United States. In other countries, employee classification will have different guidelines.
Before you make a hire, double-check that you’re not breaking any rules. It’s easier than ever to hire employees now, including across borders, so there’s no reason to cop out and hire contractors illegally.
Note: This article references the legal situation in the United States. In other countries, employee classification will have different guidelines.
Author Bio
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As the CEO of Panther, Matt Redler is working on building the economic infrastructure for the remote world. Through remote work, he believes that talent across the world––no matter where they are––can get access to great work opportunities. And that people can start living lives with more agency to be where they’re happiest. Prior to Panther, Redler founded Chefit, a personal chef startup. Connect Matt Redler Follow @MattRedler |
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