Misclassifications of workers are one of the most common mistakes that we see employers make. Unfortunately, misclassifications of workers can also be the most costly mistake an employer can make. In the state of Colorado, 1% of all employers are required to be randomly audited each year. There are multiple agencies, both on a federal and on a state level, that are passionate about worker classifications.
Employee until proven otherwise
It is important to note that the regulatory agencies would love for all your workers to be classified as employees. Employees have taxes withdrawn and paid. Therefore the IRS, state department of labor and more, are happy to collect taxes from you and your employees. We like to say, that a worker is an employee until proven otherwise. The burden of proof falls on the employer to prove that their workers are correctly classified.
But having Independent Contractors is so much easier
We completely agree that having workers as independent contractors is a whole lot easier than the complexities that come with having employees. The regulatory agencies each have their own opinion of what defines an employee vs. an independent contractor. There are many tests that determine if a worker should be classified as an employee. The IRS has the Common-Law Rules. The US Department of Labor and Fair Labor Standards Act has established 6 factors that should be considered. And each State has their own interpretation.
What can trigger an audit
There are many things that can trigger an audit on a company. Some of the most common reasons businesses are audited include:
Independent Contractor files for Unemployment Insurance
Worker files a complaint through their state department of labor
Random audits of a specific industry (Example: The State of Colorado audited all moving companies in the state)
Injured independent contractor files for Workers Compensation
Are you on the fence?
Not sure whether you've classified your workers correctly? Below is a short test that can help you determine if your workers are classified correctly. If you find yourself answering Yes more than No to the following questions, it is likely that your workers should be classified as employees.
Is the work performed an integral part of the business?
Does the worker use equipment provided by the employer?
Does the worker have a mandatory schedule with set hours?
Does the worker receive payments at set intervals and of regular amounts?
Is the worker required to work where, when and how the employer wants?
Does the employer provide training to the worker?
Must the worker personally perform the service (the worker is not allowed to subcontract to complete the service/work)?
Does the worker only work for one employer at a time?
Is the worker paid to the person rather than to his/her business?
We love HR so you can love what you do. simplyHR LLC is an HR consulting firm located in Fort Collins, CO providing partnerships to companies in all 50 states. Our goal at simplyHR LLC is to provide training, education, partnership, and resources to make Human Resources simple for small businesses.
The content of this website provides practical and HR best practice information and is not legal advice. simplyHR LLC does not provide legal advice or other professional services. While every effort is made to provide accurate and current information, laws change regularly and may vary depending on the state and/or the municipality your business operates in. The information provided from simplyHR LLC is provided for informational purposes and is not a substitute for legal advice or your professional judgement. You should review applicable federal, state and municipality laws in your jurisdiction and consult with legal counsel as you deem necessary.