Making Sure Sub-Contractors Don't Become Employees - Part One

Written by on 8/8/2016 3:00 AM in . It has 1 Comments.


Subcontractor management can be a headache, but it's well worth it for the peace of mind you’ll glean by being crystal clear up front about an independent contractor’s role with your business.

What’s the big deal?
A subcontractor, versus an employee, is responsible for their own taxes, health insurance, unemployment, and workers comp benefits. Muddy the waters by failing to clearly classify the relationship, and you could be left on the hook for an array of expensive propositions.

What’s in a name?
Not much, according to a recently released interpretation by a Department of Labor (DOL) administrator, who ascertained from the Fair Labor Standards Act that the relationship, not title, demarcates contractors from employees leaving employers liable for stiff penalties for misclassifications.

Classification conundrums
Independent contractor is more than just a title. Even labeled as such by an employer, the IRS and DOL may still classify the person as an employee based on the nature of your work relationship. Unfortunately there is no rule or test to differentiate a subcontractor from an employee, merely “guidelines.”

Subcontractor 3-category evaluation system employed by the IRS:

  1. Behavioral control:
    Subcontractors receive less instruction, determining individual work hours and performance. The company’s focus is on the end results.
  2. Financial control:
    Subcontractors work for multiple employers, shoulder workplace/equipment costs, and often carrying unreimbursed expenses. Company P&L does not affect earnings, only project completion.
  3. Relationship.
    Relationship, not a contract, determines status with contract work based on a job that is typically not ongoing. Services that are a key aspect of the business are also more weighted to employee status.
Stay tuned for DOL subcontractor management and classification guidelines from Minnesota Comp Advisor

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