9. Employee vs Contractor: Does it Matter Who You Hire for Your Small Business?
You’re probably familiar with the terms “Employee” and “Independent Contractor.” But what do they actually mean? And does it really matter who you hire for your small business?
The short answer to that second question is YES!
It absolutely does matter. Even for small businesses.
As an HR pro who’s been doing this for over 16 years, I can tell you, I see hiring employees and contractors being done wrong more often than I see it being done the right way.
In this episode of The Impact Ripple, I’m breaking down the differences between hiring employees and contractors to help you better understand the different types of workers that are available and when to hire each type in your business.
We’ll talk through the legal side of hiring and some practical steps you can take to keep you and your business out of hot water as you hire.
In this episode, you’ll learn:
The difference between Employees and Contractors
Why worker classification is such a big deal
The ONE common factor to help make determining worker classification as simple as possible
Some practical steps you can take to keep you and your business out of hot water as you hire
Mentioned in This Episode:
Should I Hire an Employee or Independent Contractor? (blog post)
The Hiring Roadmap (free download)
Get Your Free Hiring Roadmap
Our smart + simple guide to hiring employees the right way. Yes, the exact steps we take with all our clients!
Transcription for Episode 9 - Employee vs Contractor: Does it Matter Who You Hire for Your Small Business?
Ashley Cox 0:04
Welcome to Episode Nine of the impact ripple podcast the go to source for hiring and leadership made simple, doable and fun for visionary female business owners. I'm your host, Ashley Cox, author, certified HR expert and founder of sprout HR. And I believe that you don't have to change who you are to be a great leader, because you already are one. Join me as we kiss uncertainty and overwhelm goodbye, and say hello to the tools and support you need to grow a profitable, sustainable, impactful team with more confidence and ease.
Ashley Cox 0:42
On today's episode, I'm breaking down the differences between hiring employees and contractors to help you better understand the different types of workers that are available, and when to hire each type in your business. We'll talk through the legal side of hiring and some practical steps that you can take to keep you and your business out of hot water as you hire. Now, you're probably familiar with the terms employee and independent contractor. But what do they actually mean? And does it really matter who you hire as a small business owner? The short answer to that second question is yes, it absolutely does matter, even for small businesses. And that's exactly why I'm creating this episode for you today.
Ashley Cox 1:33
Something I noticed early on in my own business journey was how many businesses were getting this wrong, and still are almost seven years later. I've also noticed that misinformation breeds rather quickly in the online space, which means if one business owner with a large following is getting it wrong, they can quickly and easily spread the wrong business practices to others, who then go out and replicate them. Just because there's someone that you look up to in the online space, who has been hiring team members doesn't necessarily mean that they know what they're doing, or that their hiring practices work the same way legally, for your business type and structure.
Ashley Cox 2:21
As an HR Pro, who's been doing this for over 16 years, I can tell you, I see hiring employees and contractors being done wrong more often than I see it being done right. Now, I promise this episode is not all doom and gloom. I know you want to get this right. And now you've got a pro on your side. And I'm going to help make sure that you do. So we're going to talk about what you can do to be proactive in making sure that you're hiring and classifying your workers the right way.
Ashley Cox 2:55
There are two federal agencies, the Internal Revenue Service or IRS and the Department of Labor or DOL who both have a say when it comes to worker classifications, and that's the way that we identified the types of workers that we have in our business employee or contractor. The IRS focuses on the way that taxes are being handled, whereas the DOL focuses on the rights of the workers. Simple enough, right? Well, that would be if they were the only ones calling the shots. But states also get a stay in how workers are classified. And that's where things can start to get a little stickier.
Ashley Cox 3:39
For today's purposes, we're going to focus on the federal side of things, the IRS and the DOL. Since our audience spans coast to coast here in the US, this is a great place to start because it really does create the foundational information that you need in order to make the right decisions. And because business owners like us are responsible for knowing and following all federal and state laws. However, I do want to emphasize that this episode is not the end all be all authority on worker classification. You do need to check in with your state's laws to just make sure that you're getting it right.
Ashley Cox 4:20
Worker classification is important and something that we all need to know as small business owners who are hiring or planning to hire help in our businesses. Treating an independent contractor as an employee or treating an employee as an independent contractor is what is called Miss classification of a worker and the Department of Labor states. Miss classification is a serious issue that denies workers rights and protections under federal labor standards, promotes wage theft allows certain employers to gain an unfair advantage over Law Abiding businesses and hurts the economy at large.
Ashley Cox 5:04
You see under the Fair Labor Standards Act, or FLSA, employees are entitled to minimum wage, overtime and other benefits. Independent contractors are not entitled to these benefits, but they generally have more flexibility to set their own schedules and work for multiple companies. And those are the primary differences.
Ashley Cox 5:29
These guidelines apply equally to all employers, whether you're a solopreneur, hiring your first contractor, or a large corporation with hundreds of 1000s of employees. It's important to understand the differences between employees and independent contractors though, so that you can correctly choose and properly classify the workers that you hire. Because failure to do so can lead to hefty fines, stiff penalties, and other unwanted consequences. But every business operates differently. And the type of worker you need and should legally hire will depend on the position you're hiring for, and the work that person will be asked to do.
Ashley Cox 6:17
Over the years, a lot of businesses both large and small, have hired independent contractors instead of employees in order to avoid paying taxes, insurance and other obligations that come along with hiring employees.
Ashley Cox 6:33
When you treat your independent contractor like an employee, then the government views that as an employee employer relationship, which means that when you misclassify, an employee as an independent contractor, they may be denied access to federal benefits and protections under the law.
Ashley Cox 6:54
In many cases, employers misclassify workers to avoid certain costs that are associated with hiring employees, including things like minimum wage and overtime laws, and employer share of Social Security and Medicare taxes. Employee benefits such as vacation sick pay and holidays, unemployment insurance and benefits, workers compensation insurance, civil rights and discrimination protections, and various other protections that fall under federal, state and local laws. And don't get me wrong, those can definitely add up. But if you are in the business of doing business, these are the rules of the game that you must follow in order to be in compliance with applicable laws.
Ashley Cox 7:41
Now you might be thinking, Yeah, but Ashley, I am such a small business in the grand scheme of things. How would anyone ever know and why would they care? Let me tell you, they will know and they will care. Here are a few ways just a few that a business might get caught misclassifying a worker regardless of their size. First, a worker who believes that they've been misclassified can file a complaint with the Department of Labor.
Ashley Cox 8:13
A worker who has been classified as an independent contractor may file for unemployment benefits when the work dries up. And that'll be a red flag. A worker who has been classified as an independent contractor gets hurt while working for you and files a workers compensation claim.
Ashley Cox 8:31
Or the Department of Labor or IRS might conduct a random audit of your company on all independent contractors and employees that you've hired. And they do this for the past three years, not just the current year. And as a side note to this last part, federal agencies are teaming up now more than ever, to enforce worker classification in small businesses. And a newly proposed rule on classifying employees by the Department of Labor this year could mean even stricter regulations on gig type workers.
Ashley Cox 9:05
Even if the IRS and or the DOL do conduct an audit and find that the MIS classification was unintentional, which absolutely happens. You'll still be required to pay back pay back taxes and penalties for failing to file W tos and failing to pay taxes. However, if the MIS classification is found to have been intentional, you'd be required to pay all of that. Plus, you could face even more severe penalties and fines, as well as criminal penalties and jail time.
Ashley Cox 9:42
Whether a worker should be classified as an employee or an independent contractor isn't up to us as the business owners. It's determined by the nature of the working relationship. And just because you issue someone a 1099 or they themselves state that they are an independent contractor does not necessarily mean that they are an independent contractor. Again, it's determined by the nature of the working relationship.
Ashley Cox 10:14
So how do you know which type of worker to hire, or how you should be classifying your current workers? Well, lucky for us, the IRS has a 13 factor test to help us determine worker status. The DOL has their own set of rules, which again, they've just announced a proposed rule change this year, and states have their own regulations. Not confusing at all right?
Ashley Cox 10:37
I know, I know, this can be really squirrely. And if you want to keep up with more updates on these proposed rule changes, and various things that impact employee and worker status, be sure to follow us on our socials at Sprout hr.co, we're on Instagram, Facebook, LinkedIn, all the places, because these things are kind of nebulous, and they change frequently, which also doesn't help us understand what we should be doing and who we should be hiring. But here's the good news for you. And I told you, this wouldn't be all doom and gloom. I know this, I know, this topic can definitely feel like oh my gosh, I'm in trouble. What am I going to do? But I promise that it's not. And I've got you. So you're in good hands.
Ashley Cox 11:22
I have found one common factor one common thread through all of these regulations and laws that helps to make determining your worker classification simpler. That's good news, right? This one factor is called degree of control. And it's generally the basis for all of the factors that are taking into consideration by the IRS, the Department of Labor, the states, etc, etc.
Ashley Cox 11:52
Now, degree of control simply means how much say your company has over the individual who's working for you, including things like what work they'll be doing, how they'll be doing the work, what tools they'll be using, and when they'll be doing the work.
Ashley Cox 12:10
Now, the IRS has outlined some common law rules to help guide businesses in classifying their workers properly through three main categories, which I do find super duper helpful. And these are behavioral, financial, and type of relationship. So here are some questions to consider in each of these categories to help you determine the degree of control and how to properly classify your workers.
Ashley Cox 12:41
First, we have behavioral, will the company control how the work is being done? Will the company control when the work is being done? And this excludes things like deadlines? Right? This is just the actual hours of work. I need you to work Monday through Friday nine to four.
Ashley Cox 13:00
Okay. Second, financial. Will the company control how the worker will be paid? Will the company reimburse expenses to the worker? In other words, is this person buying stuff for the company that they will then get paid back for? Will the company provide training or tools for the worker to do their job?
Ashley Cox 13:25
And number three, type of relationship? Is the work being performed essential or integral to the business? Will the relationship be ongoing or long term? And will the worker receive any benefits such as vacation pay health insurance stipends, etc?
Ashley Cox 13:47
Answering yes to any of the above questions means you will have a greater degree of control over the worker that you hire. However, this doesn't automatically mean that your worker needs to be classified as an employee. But it does give you a heads up to kind of take a closer look at the nature of the relationship and how much control you as the employer will need to have or will want to have. Unfortunately, determining worker status isn't as easy as answering a few questions though.
Ashley Cox 14:23
There's no magic formula or system that you can plug your answers into that shoots out a clear cut answer for you. But boy, wouldn't that be nice? There are even cases where a worker might be classified as a contractor in one company or for one position, but may need to be classified as an employee in a different company or for a different position.
Ashley Cox 14:48
I know this can all get pretty confusing, but that's why it's helpful to work with a professional to help you determine which type of worker you should hire for your business. And this is something that we help our clients with all the time here at Sprout HR through our Hiring VIP Day service, as well as inside of our group program, The Ripple Collective. And I'll drop the links for both of those in the show notes below for you.
Ashley Cox 15:14
But what's most important today is that you now have a better understanding of what worker classification is, and why it's so important. This foundation will allow you to pause, consider the work that's being done, and make more informed hiring decisions. All of which will help you hire the right workers at the right time, in the right way, and keep you and your business out of hot water.
Ashley Cox 15:44
As we wrap things up today, it's time once again, for our final segment, imagine the impact, where we get to envision what it could look like for you to take action today. Well, worker classification might not be the sexiest part of growing a team. It's an essential part to ensuring that we're creating fair, equitable employment opportunities for everyone who joins our team.
Ashley Cox 16:12
Workers have been exploited for years by companies that are driven solely by revenue and profits, rather than by doing what's right for their people. As a small business owner, you have a chance to change that with every hire you make. Imagine the impact that being an informed and integrity driven employer could have on your team, your business, your community, and the world.
Ashley Cox 16:43
If you found this episode helpful, we'd love for you to share about it on social media so that it can reach more leaders, just like you who are trying to get this whole hiring thing, right. Simply take a screenshot of the episode on your phone, then share it on Instagram stories with your favorite takeaway. And don't forget to tag us at sproutHR.co So we can see what you really enjoyed about today's episode. Thanks so much for joining me today on the impact ripple podcast. It's an honor to be here with and for you on your leadership journey.
