Small Business Tip: Employee or Independent Contractor

Whether you own an existing business or are starting a new one, it is important to properly classify workers as either employees or independent contractors. Since independent contractors are not covered by employment, labor, and related tax laws, a new business owner might be tempted to use that classification to avoid paying payroll taxes, benefits, and other liabilities.  To determine how to classify your employees, you should analyze various factors, including:

• The type of work being performed;
• Whether the worker is supervising your employees;
• Whether the worker has his/her own tools and equipment to perform the work;
• The amount of control you have over the worker (such as who sets the work hours and the pay rate);
• Whether the worker has his/her own insurance;
• Whether the worker works for other companies or exclusively for yours;
• Whether the worker advertises his /her services separately.

Typically, an independent contractor signs a written agreement that defines the terms of his/her relationship with a company. However, such an agreement does not automatically make the worker an independent contractor.  If you are being investigated by a government agency, the written agreement might be one factor considered, but it is not likely to cut short the inquiry or end it altogether.

Also, consider this: if an employer fails to pay wages owed to an “employee,” that employer could be liable under Arizona law for three times the unpaid wages.  If a court or government agency finds that your business classified an employee as an independent contractor and failed to pay wages properly, you could face other penalties, including employment taxes you should have been paying all along. Other issues to consider include immigration and worker’s compensation coverage.

My grandmother had a wise saying: “Begin as you mean to go on.”  Her advice was good for life and good for business. Whether you own an existing business or are starting a new one, it is wise to classify your workers properly.  If you think you have made an error, you should take steps to correct it so that it doesn’t lead to bigger problems down the road.

At Hymson Goldstein & Pantiliat, PLLC, we have experienced employment law attorneys who can guide you in avoiding these legal pitfalls.

Written by Attorney Lori Brown, lbrown@hgplaw.com

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