Be Careful: 1099 Contractor or Employee?

from: Dana Schultz, The High-touch Legal Services Blog

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Small companies usually need to conserve cash, so they often turn to independent contractors rather than employees. The logic seems impeccable. If there is not enough work to justify a regular employee, the company can use an independent contractor when needed. That way the company avoids making unemployment and social security contributions and does not pay benefits such as health and life insurance, retirement plan contributions and personal time off.

There can be problems, however. If the individual really is doing the work of an employee, the Internal Revenue Service or the Employment Development Department might reclassify the individual as an employee, erasing the presumed financial benefits.

So how can a company avoid mistakes in this area, given that laws are complex and multiple government agencies are involved? It must look at the factors that the relevant agency applies. Here are some examples:

• If the company can tell the individual how to do the work, the individual looks more like an employee; an individual who decides how to do the work looks more like an independent contractor.
• An individual who already has the necessary skills and training looks more like an independent contractor; one who needs training looks more like an employee.
• An individual who is doing work for only one company looks more like an employee; an individual with multiple customers or clients looks more like an independent contractor.
• An individual who always works at the company’s location looks more like an employee; an individual who works elsewhere looks more like an independent contractor.
• An individual who works on the company’s normal day-to-day business looks more like an employee; an individual who works on occasional special projects looks more like an independent contractor.
• An individual who is paid a fixed fee for a defined scope of work looks more like an independent contractor; an individual who is paid based on time may look more like an employee.
• An individual who is working under an appropriately drafted agreement looks more like an independent contractor; an individual without an agreement looks more like an employee.

If you want to treat an individual as an independent contractor rather than employee, do your best structure the relationship appropriately.

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