You can’t do it all on your own. You’ll prob­a­bly hire out­side peo­ple to do a lot of work for you. This works out great, you don’t have to pay employ­ment taxes, work­ers’ com­pen­sa­tion, unem­ploy­ment com­pen­sa­tion, ben­e­fits, and office space and equip­ment for these peo­ple. You don’t have to worry about wage and hour law, fam­ily and med­ical leave, and many other laws that apply to your employ­ees. You’re not liable for their neg­li­gence (unless they’re act­ing as your agent), and they can’t make worker’s comp claims against you (though they can make claims for your negligence).

But your busi­ness starts to grow. Maybe you need some­one on the week­end to stock shelves. Maybe you need some­one to help you write a pro­posal. You buy equip­ment for them to do their job. You give them space in your office. You start need­ing them more and more. This is where it gets dan­ger­ous. If you start to con­trol what is to be done and how it’s done, then your inde­pen­dent con­trac­tor might now be your employee. Once they are your employee, you’re required to pay things such as pay­roll taxes and worker’s comp and you’re now sub­ject to many employ­ment laws. It’s a whole new world.

There’s no clear line when this hap­pens, each law or agency has it’s own fac­tors to deter­mine where that line is. The DOL has its own, the IRS has its own, and there’s also case law for tort lia­bil­ity. But all of them have sim­i­lar factors.

If you ask your­self the fol­low­ing ques­tions, you’ll more than likely be safe with all these laws and agencies:

  • Do you pro­vide instruc­tion to the person?
  • Do you pro­vide train­ing to the person?
  • Does this per­son use your trademarks?
  • Do you invest in equip­ment and other items to sup­port the individual?
  • Do you reim­burse the per­son for busi­ness expenses?
  • Is the per­son pro­hib­ited from pur­su­ing other busi­ness or employ­ment opportunities?
  • Is the per­son pre­vented from earn­ing a profit or loss from the work?
  • Does the per­son work with­out a writ­ten contract?
  • Does the per­son per­form key aspects of your business?

The more yes answers means the per­son is more than likely your employee and not an inde­pen­dent contractor.

What hap­pens if you get it wrong? You must pay for the person’s social secu­rity tax, fed­eral income tax, and unem­ploy­ment insur­ance for three years plus inter­est and penal­ties. You might be liable for over­time wages and penal­ties. There might be ram­i­fi­ca­tions for work­ers’ com­pen­sa­tion and other laws that apply to employ­ees. You might be liable for their negligence.

The best way to avoid a mis­clas­si­fi­ca­tion is to sign con­tracts with your inde­pen­dent con­trac­tors. You get much more pro­tec­tion if the con­tract is with a cor­po­ra­tion or a lim­ited lia­bil­ity company.