Even if you’ve never run a business before, you can probably imagine that there are many more laws governing the relationship between a company and its employees than between a company and its independent contractors, so you might rightly conclude that it is generally less costly to hire independent contractors instead of employees. What you may not know, however, is that federal and state laws closely regulate when workers may be categorized as independent contractors and when they must be treated as employees.
Various federal and state laws apply different tests to determine if a worker is properly classified as an employee or independent contractor, but they all try to ascertain the extent to which the employer retains the right to control the manner in which work is performed. The more control the employer exerts, the more likely the worker is an employee, not an independent contractor. Factors considered may include integration of the worker’s services with the company’s business, whether the services must be rendered personally, how the hours of work are determined, how the work is compensated and whether the worker works for more than one company at a time.
The real difficulty for employers, particularly those with employees in several states, is that the factors considered can vary considerably, leading to different outcomes under different tests. Massachusetts, for example, requires that the services provided by a worker must be outside the normal course of the employer’s business in order for the worker to be classified as an independent contractor.
Misclassifying an employee as an independent contractor may subject the employer to federal and/or state (as applicable) tax liabilities, including interest and penalties. Massachusetts employers who misclassify workers may also face civil and criminal penalties, and in extreme cases liability may extend to officers of the employer.
The bottom line is that failing to properly classify workers can have significant negative consequences, so it is important that you consult with your legal advisor whenever you are at all uncertain about the classification of a worker.