Failing To Properly Classify Workers As Employees vs Independent Contractors

Pay Me Now or Pay Me Later is a series of short tips on common legal mistakes small business owners make.

Tip # 5 Properly Classify Workers as Employees versus Independent Contractors

Often companies attempt to save on employer-related employment taxes and other employment costs by classifying some of their workers as independent contractors instead of employees. But if this classification is not accurate, the employer may be subject to significant additional costs and penalties, including claims for unpaid overtime and failure to properly withhold and remit employment taxes. Whether a worker should be classified as an employee or independent contractor is determined based on a facts and circumstances test. For a worker to be properly classified as an independent contractor, the entity paying for his or her services must be able to control or direct only the result of the person's work and not what work will be done and how it will be done. If the entity paying for