By: Nicholas J. Linz, Attorney at Hager, Dewick & Zuengler, S.C.
Many businesses utilize the services of independent contractors in lieu of standard W-2 employees. Many employers benefit from the use of independent contractors because independent contractors bear their own risk of unemployment and workplace injury. They also bear the responsibility of paying taxes upon their earnings. Therefore, employers who utilize independent contractors avoid liability for Unemployment Insurance taxes, Workers Compensation premiums, State and Federal income and employment tax withholding, and Social Security and Medicare tax withholding.
These benefits may sound appealing and could create the cost-saving competitive advantage you are looking for as an employer. However, before you ask your employees to sign Independent Contractor Agreements, or before you give yourself a pat on the back for having already done so, it is essential to make sure you understand the difference between an employee and an independent contractor in the State of Wisconsin, and properly classify your workforce accordingly. An employer guilty of misclassifying its workforce may be liable for additional tax, interest and penalties from the State of Wisconsin. Further, employers engaged in the construction business may be subject to a stop work order.
The fact that you designate a person as an independent contractor, or that you have a signed Independent Contractor Agreement in place, does not end the discussion. The State has the ultimate say, based upon a list of factors, whether a person is an employee or an independent contractor. Employers bear the responsibility for proper classification, and a signed Independent Contractor Agreement will not prevent you from being liable if your “independent contractor” is determined to be an employee by the State. This article will provide a summary of basic questions you, as an employer, should answer to assist in the proper classification of your workforce. As with anything, there are nuances and specific circumstances which may blur the line between an employee and an independent contractor. In addition, there are separate rules for non-profits, governmental agencies, and those engaged in the trucking or logging industry. An experienced employment law attorney can assist you in resolving any worker classification questions/issues.
Classification of general private-sector workers involves a two-part test. The first part of the test involves the control and direction under which the worker performs his/her duties. If the worker is found to be under the control or direction of the employer, the worker is an employee. Conversely, if the worker performs his/her duties independently, and free from the control or direction of the employer, the worker may qualify as an independent contractor and the employer should move on to the second part of the test. To help answer the first part of the test, the employer should consider the following five factors: (1) is the worker required to comply with instructions concerning how to perform his/her duties; (2) did the worker receive training with respect to the services to be performed for the employer; (3) is the worker required to personally perform his/her duties (as opposed to having the freedom to subcontract for the performance of said duties); (4) are the duties of the worker required to be performed at specific times or in a particular order designated by the employer; and (5) is the worker required to give reports to the employer on a regular basis. The more factors you answer in the affirmative, the more likely the worker is an employee instead of an independent contractor.
If part one of the test does not qualify your worker as an employee, you can move on to part two. Part two involves a nine-part “employment conditions” analysis. A worker must meet six of the following nine conditions to be considered an independent contractor: (1) the worker advertises or otherwise affirmatively holds himself/herself out as being in business for hire (even if that business is self-employment); (2) the worker maintains his/her own office or is free to perform most of his/her duties in a location chosen by the worker and uses his/her own equipment or materials in performing said duties; (3) the work operates, or is free to operate, under multiple contracts with one or more employers at the same time; (4) the worker bears the responsibility for the main expenses related to the services he/she provides under contract; (5) the worker is obligated to redo unsatisfactory work for no additional compensation or is subject to a monetary penalty for unsatisfactory work; (6) the services performed by the worker do not directly relate to the employer retaining the services (if the worker is hired to perform duties consistent with the general business of the employer, the worker is likely an employee); (7) the worker may realize a profit or suffer a loss under contracts to perform such services; (8) the worker has recurring business liabilities or obligations (ie. – the worker incurs business costs independent of whether or not the worker does work for the employer, such as office rents, equipment costs, etc.); and (9) the worker has other contracts or business opportunities such that he/she is not economically dependent upon a particular employer with respect to the services being performed.
Employers with independent contracts should be mindful of this two-part test to avoid liability for misclassifying its workforce. Small businesses are particularly prone to misclassification. If you realize you have been misclassifying a worker, or if you have further questions regarding worker classification, seek the counsel of an experienced employment attorney.