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Welcome to the Bringing the Human Back to Human Resources
podcast. I'm Tracy Chernoff and I've
spent my entire professional career in HR.
Each week. We'll explore the delicate
balance between people and business with the aim to
reconnect the two and create meaningful outcomes.
Listen in as I share my own experiences, challenge the
status quo, and chat with guests from various industries about
our mission to bring the human back to human resources.
Hi everyone, Welcome back. To the Bringing the Human Back
to Human Resources podcast. Thank you so much for being here
for another week. I am audio.
Only. For this episode because I'm in
the middle of moving and I promise you, you do not want to
see my background, so please bear with me over the next few
weeks. I might I will probably be audio
only for any episodes that are solo, like just me without a
guest, just because it's a it's a crazy chaotic time, so it's a
little bit easier not to worry about my background and what
things are looking like, so to speak.
So before I jump into this week's episode, please make sure
that you are subscribed to my newsletter, which comes out
weekly. You can subscribe to it at HR
tracy.com. And be sure to follow me on all
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I don't have Twitter or TikTok, so almost all of the social
media accounts and my handle is HR Tracy for all of them.
So you can connect with me on any platform that feels best for
you. And so many of you connect with
me on Instagram and LinkedIn. That's usually where I get the
most. You know, I guess like messages,
let's say from those of you. So it's really nice to have that
connection outside of the podcast where it's really kind
of just like one way and me speaking at you.
So anyway, moving on, this week's episode is about
contractors and the potential for misclassification.
I don't think that I've spoken about this before in terms of
like what contractors are compared to employees.
And the risk of misclassification, so we're
going to dive into that this week.
Before we kind of jump into misclassification, I think it's
really important to first understand the differences
between contractors and employees.
So there are some key differences.
The 1st is when we think about an independent contractor,
sometimes they're called freelancers or consultants.
These are ultimately selfemployed people who provide
services, resources, products. Etcetera to other companies or
organizations. They are managing their own
taxes, their own benefits. They're paid via invoice.
Typically, they have their own equipment.
They're responsible for their own upskilling and development
and coaching and training. So let's jump into the
misclassification side of this conversation.
As an. HR.
Professional, it is really important that we are clear on
not only the differences between contractors and employees, but
also where we can understand or what we can do as far as
understanding what we can do to mitigate any risk of
misclassification. So I found a really great
resource from the IRS actually, which is the IRS20 factor test.
And it helps companies to determine whether someone is an
independent contractor or an employee.
And there are 20 factors, so bear with me as we go through
all 20 of them. The 1st is level of instruction.
If the company directs when, where and how the work is done,
this control indicates a possible employment
relationship. Why is that?
That is because employees are fully reliant on the direction
of a company, right? Whereas a contractor and this.
You know this is not like a hard and fast thing like there can
there is Gray area in in all of this.
So just you know take a little bit of it with a grin of salt
like don't freak out if you have contractors that are directed,
it's it's you know partner with your attorneys and your counsel
to make sure that you are not misclassifying.
But I just want to share that you know there these are things
that the IRS for example could evaluate if there was any
concern raised about misclassification.
So level of instruction again for a contractor, you know they
are tasked with something and then they determine how they
work on it. Now of course there is that Gray
area where someone might be contracted to work or cover like
a maternity leave or do something that is not as much
project based, but more so you know they're working on
something consistently. It's there is still.
A bit of Gray area there, but misclassification can be really
common or is really common, so it's not as Gray as you'd think
it is Amount of training. Requesting workers to undergo
company provided training suggests an employment
relationship, with the exception of course.
I want to remind everyone that certain states do require
contractors to go through legally required training.
Degree of business integration Workers whose services are
integrated into business operations or significantly
affect business success. Extent of personal services
companies that insist on a particular person perform
performing the work assert a degree of control that suggests
an employment relationship. In contrast, independent
contractors typically are free to assign work to anyone.
Also Gray area there control of assistance.
Continuity of relationship. I won't go through all of these
because I think we understand that there is Gray area and you
should connect with an an attorney to make sure that you
are clear and in the green. Flexibility of schedule demands
for fulltime work. So fulltime work gives the
company control over most of a person's time, which supports a
finding of an employment relationship.
So contractors typically. Are again you know we'll we'll
see them working on an hourly or project related basis, but there
are moments where contractors are working on a full time
basis. So again Gray area here need for
onsite services sequence of work, meaning if a company
requires work to be performed in specific order or sequence
requirements for reports, method of payment, hourly, weekly or
monthly pay schedules are characteristic of employment
relationships unless the payments.
Or a convenient or simply a convenient way of distributing A
lump sum fee. So this comes back to what I had
initially said about, you know, payroll schedules versus a
contractor who's paid by invoice, payment of business or
travel expenses. Again, that is a benefit, right?
That's a perk. That is a one way to really,
clearly distinguish the difference between contractors
and employees, provision of tools and materials, So in this
case equipment. Investment in facilities.
Independent contractors typically invest in and maintain
their own facilities. Employees typically rely on
their employer. You know in the case, for
example, for an office and things like that realization of
profit or loss. Workers who receive
predetermined earnings, who have and have little chance to
realize significant profit or loss through their work
generally are employees. That I think is usually pretty
clear between employees and contractors.
If someone works for multiple companies, people who
simultaneously provide services for several unrelated companies
are likely to qualify as independent contractors.
This again comes back to the ability to work for multiple
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Availability to public so regularly making services
available to the general public, for example, is typically in
support. Is someone that would be an
independent contractor control over discharge or termination?
A company's right to discharge a worker suggests an employment
relationship. In contrast, a company's ability
to terminate independent contractor relationships
generally depends on contract terms.
Which is so true if you work with an agency.
Sometimes in order to terminate someone you do have to provide
certain amount of notice. It depends on the terms of the
contract and the conditions within that contract.
So really important to follow all of that if you are working
with contractors today. And then finally right of
termination, most employees unilaterally can terminate their
work for a company without liability, whereas independent
contractors cannot terminate services without liability
except as allowed under their contracts.
So hopefully this 20 factor test can help all of you to better
understand the differences and avoid misclassification because
misclassification is super common again.
And you know there are moments where companies do kind of
operate too much in a Gray area and it's important that there is
clarity and guidance around the difference between a contract.
Relationship and an employment relationship.
So to further expand on this, the IRS goes on to share that
because the FLSA only applies to employeremployee relationships,
independent contractors are not covered.
So the FLSA is what determines wage minimums, right and benefit
requirements and who can be salary versus hourly and all of
those things. I'm not going to go through
everything, but. All of those coverages are only
applicable to employees, so it is also important that when you
are hiring, whether you're hiring a contractor or an
employee, that you are clear on FLSA standards for employees and
that contractors do not abide by this or are not covered by the
FLSA So. Being clear on all of this
guidance and all of the government regulation is super
important and again I can only stress this enough.
Having a good attorney to work with is really, really
important. Employment law attorneys are
very helpful when it comes to being able to navigate these
differences and what companies are required or you know,
responsible for when it comes to these, you know, relationships.
The IRS considers a worker to be an employee if a company has the
right to control not only what work will be done, but also how
the worker will do that work. If someone is treated as an
independent contractor, but the IRS decides that there's
sufficient control from an organization over the worker to
create an employment relationship, the IRS can hit
the organization with a very costly bill for employment
taxes. That should have been paid, you
know, withheld and paid. So this is kind of the outcome
of misclassification. If someone is misclassified as
an independent contractor, that means the business has not been
withholding taxes, employment taxes specifically for that
individual. And the last person anybody
needs a problem with is probably the IRS.
And so it is. So I know I keep reiterating
this, but it is so critical to understand and make sure that
people are classified correctly. In order to really make sure
that you are in the clear, I would highly recommend that you
use this 20 factor. I think it's a 20 factor common
law test. I think that's technically what
it's called to ultimately measure the level of control.
These are all reflected again on the IRS.
I'll make sure that I link this resource in the show notes.
And the other thing that I'll say is that there are companies,
there are agencies out there, not only agencies, but major
companies that make employing contractors much easier.
And so for U.S. companies, for example, that maybe have a need
for someone outside of the US, they can employ a contractor.
In another country and kind of offset all of their
responsibilities and you know the requirements that maybe
those companies do not have a clear handle on to those
companies and agencies that help to support the contractor
relationship. But there is of course a fee and
the company still has the liability and the requirement
and the requirements to make sure that they with internally
are following the appropriate processes.
You know for example in like super large, really structured
companies, you won't find contractors in any all hands
meetings or you know meetings that discuss like the business
at length because of the access to information and the control
over that information. And and of course you know
thinking about some of these factors, we can understand that
this is a one way to be very clear about the difference.
In the relationship, and I know from speaking with HR people in
the past that sometimes there's this feeling of, well, I kind of
feel bad they're doing all this amazing work and I want to be
able to give them a gift card for their birthday or I want to
be able to do XY&Z. My best advice to you is to not
feel bad and just don't do it, because when you blur that line
between contractor and employee, you raise the risk for your
company. Of potentially misclassifying
that contractor. So it's I would just say best
advice, work with an employment law attorney and make sure that
you are not blurring the line where it's unclear whether
they're a contractor or an employee because you're going to
create so many challenges not only for you but also for your
organization. So this obviously.
Is a super high level. Kind of like introduction almost
to contractors and misclassification or potential
misclassification. If this episode was interesting
to you and you want to hear more.
We've heard from Carly Juanos already.
She's our resident employment law attorney.
At this point on the podcast, I could always have her come back
and we can dive into this a bit more.
So just. Let me know.
If you listen to this podcast on Spotify, there will be a pull
up. So you can vote if you'd like to
hear more of this. Otherwise, e-mail me at
contact@hrtracy.com or write to me on Instagram or LinkedIn and
let me know if you want to dive into this a little bit more
deeply so we can have an even deeper understanding of the
difference between contractors and employees.
Thank you so much for listening to the episode this week.
I hope you have a fabulous week ahead.
Wish me luck as I move back to New York, because moves are
always a nightmare and we. Will chat soon.
Have a great week. Hey, just before you go, don't
forget to subscribe to this show so that you are the first to
hear when an episode drops each week.
And maybe leave a 5 star review and a comment about how much you
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with them. Thank you so much for tuning in
and I'll see you next. Week.