To attract and retain the best talents is an essential key for the successful operation of any organization. Some of the international companies that are focused on global expansion tend to cooperate with independent contractors worldwide to enter new markets. It is totally clear in terms of short-term projects. But what if you create a great product or service and want to spread your vision, company values, and culture within it? This will be possible not only with the help of a product “idea” or “solution” but also thanks to people working on it. The main idea at this point is to convert valuable talent into an employee.
Difference between Contractor and Employee
The main difference between independent contractors and employees is actually “independence” itself. Contractors are mostly freelancers with some specific skills for concrete tasks. Contractors pay taxes on income on their own and they are not entitled to some benefits as employees are, like medical insurance, retention plan, paid leave, etc.
Employees are performing job responsibilities for employers according to the specific terms set by force in the employment agreement and in terms of labor legislation. In return, employees are paid a salary, not a remuneration. Salary is subject to taxation for both employers and employees. Based on paid taxes, employees get social benefits and entitlements provided by the government.
According to the IRS, to better determine how to properly classify a worker, consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties
Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:
- Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
- Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflect less control, indicating that the worker is more likely an independent contractor.
- Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
- Training a worker on how to do the job — or periodic or on-going training about procedures and methods — is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.
Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job? Consider:
- Significant investment in the equipment the worker uses in working for someone else.
- Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
- Opportunity for profit or loss is often an indicator of an independent contractor.
- Services available to the market. Independent contractors are generally free to seek out business opportunities.
- Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.
Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.
The Dangers of Employee Misclassification
The sorts of fines available vary by legislation, as does the method by which a penalty is generated. Penalties might be assessed per employee or per statement. Penalties are frequently set as a percentage of the compensation or benefits due.
State and federal fines are typically classified as follows:
- Administrative penalties and fines for noncompliance
- Intentional misclassification carries criminal consequences, including the possibility of imprisonment.
- Paying back salary and perks with interest
If you want to convert contractors to employees and avoid misclassification consequences, reach out to Acvian today for the right solution.