Independent Contractors – Are you classifying your employees correctly?

A recent article was written by Sarah Coli, JD, member of the Government Affairs Counsel with PIA (Professional Insurance Agents). She discussed a relevant topic many of us can relate too – independent contractors. Hiring independent contractors instead of employees is a method of saving money, especially on workers’ compensation insurance.

You all are familiar with the Uber lawsuit. Uber is now estimated to be worth $66 Billion as of July 2016. Drivers had filed suit against Uber claiming they were mis-classified as independent contractors instead of employees. Therefore, they should have been reimbursed for expenses like gas and vehicle maintenance. Uber tried to settle for $100 million but the courts refused stating that $100 million was only 10% of what was potentially owed.

The 1099

The first danger to classifying an employee is assuming that giving an employee a 1099 form makes that worker an independent contractor. The form is just how the employer classifies a worker for federal tax purposes and doesn’t mean the worker is correctly classified.

Two Tests to find out if your worker is an Employee or Independent Contractor

1.       The ABC Test

This test is used in Connecticut, New Hampshire, New Jersey, New York, and Vermont. Independent contractors MUST meet all 3 criteria to be classified as an independent contractor.

A.      The worker must be free from direction and control in the performance of the service, both under the contract of hire and in fact (meaning the employer can control the result of the work, but not they day-to-day operation of the individual); and

B.      The worker’s services must be performed either outside the usual course of the employer’s business or outside all the employer’s places of business (meaning the individuals pick when and where they complete the service); and

C.      The worker must be “customarily engaged” in an independently established trade, occupation, profession or business of the same nature as the service being provided (meaning the worker must be engaged in a profession that they will continue to pursue; ex: a technician will not stop their career midway through the job and start working as a nail tech).

2.       The Common Law Test

This test in used in Connecticut to determine who is an employee for the purpose of workers’ compensation, New York uses it for a majority of workers in the state, and New Jersey uses it for determining classification for employment taxes. The main question in this test:

“How much control does an employer have over a worker?”

The test is all about control, and if workers have a fair amount of it, then they are considered independent contractors.

It could be incredibly detrimental to an employer to mistakenly classify an employee as an independent contractor. Connecticut’s Public Act 10-12 makes it a class D felony for any employer who knowingly misrepresents one or more employees as independent contractors to an insurance company. The state can impose a penalty from $300-$600.

If you need any further information, please feel free to call us at Svendsen Agency at (203) 397-3993!

Works Cited:

Coli, S., JD. (2017, January). A conversation about independent contractors. PIA Professional Insurance Agents, 19-22.