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Are Your Staff Employees or Independent Contractors?

If your staff are classified as Employees, then California law requires that you have Workers’ Compensation Insurance in place. To learn what coverage the Workers’ Compensation policy provides both your business and your staff check out our Workers’ Comp Explanation.

Misclassification of staff as Independent Contractors when they are actually Employees can be a costly error. Employers can face paying back taxes, back pay to staff (including for unpaid overtime), retroactive benefits as well as interest, fines and legal fees.

Classifying Your Staff

The US Dept. of Labor has produced Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA) to help business owners with the classification of their employees.  The U.S Supreme Court has ruled there is no single rule for determining whether someone is a member of staff or an independent contractor. Factors considered when evaluating are:

  1. The extent to which the services rendered are an integral part of the principal’s business.
  2. The permanency of the relationship.
  3. The amount of the alleged contractor’s investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The alleged contractor’s opportunities for profit and loss.
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
  7. The degree of independent business organization and operation.

Other factors that have been declared irrelevant in determining employee status include where the work is performed, the absence of a formal employment agreement, State or local licenses, the frequency or mode of payment.

Independent Contractors

Once you have classified your staff as independent contractors you should make sure that you keep accurate records for each contractor. Create a file for each contractor and include the following information.

  • W-9 Form – Every independent contractor should complete a W-9 form as this is needed for creating a 1099 tax document. If the contractor is not claiming exemptions then you should withhold taxes, however you should encourage them to check the box and file their own self-employment taxes.
  • Invoices – Keep every invoice your contractor submits and make payment against them. At the end of the year these payments should match the 1099 form you issue. Also remember that contractors are not employees and therefore should not be claiming expenses, equipment or mileage fees as these are expenses incurred by their business.
  • Proof of Business – The best way to prove a staff member is an independent contractor is if they have their own business to keep anything you have that reflects their business status. Business stationery, brochures, cards etc. are all acceptable as proof as well as printed pages from their website outlining their services.

Employment laws are very strict so making sure you classify your staff appropriately is very important. If you have employees, then Workers’ Compensation Insurance is a legal requirement. At the J G Petit Insurance Agency we work with businesses to ensure they have the coverage they need. Call today at (855) 509-0001 to talk to someone about your business and make sure you have the policies in place to operate safely and legally.

 

 

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John Petit

John has a degree in Finance, a Master’s degree in Management, and is licensed to offer insurance products, financial products such as mutual funds and retirement plans.

Published January 11, 2023. Updated October 5, 2023

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