Many small businesses want to hire independent contractors because they often cost less than employees, but far too many misclassify these roles, as noted in a prior blog. Many business owners are tempted to call an employee a contractor because they prefer to pay them that way, and the pandemic and the rise of remote work has only increased this thinking for some.
Employers do not arbitrarily determine who is a W-2 employee and who is a 1099 independent contractor. There are legal definitions for each, and how you communicate with the person helps determine how the role is classified.
Control over the work
While there are checklists to help you figure out which classification type you are hiring, it really comes down to control. The more specifics you control of a person’s schedule, equipment, and work life, the more likely they are to be an employee. A person who has required hours, company-owned equipment, an office space at your business, and little control of how their work is produced is most likely an employee. Their position, wages, and benefits should be set up as such. With a contractor, you are paying for a deliverable. Most likely, they will be paid by the job, and you have very little control over when, where, or how they create the deliverable.
Communication about the work
An employee or independent contractor’s classification is determined by how we structure the position and how we interact with the people in those positions. Since how we treat the position helps define whether a person is a W-2 employee or independent contractor, it is important that our communication doesn’t blur the lines.
It helps to remember that the more control we have over the position, the more likely the person is an employee. This extends to how much say we have over the person’s work habits, fit for the company, and job performance. With an employee, there is more accountability to the company, and that means the company has the responsibility to train, coach, and work with any problems that might arise.
Communication with an independent contractor is different than with an employee. For a contractor, the communication is focused on the deliverables defined in the contract and whether or not those deliverables meet the defined expectations.
Resolving issues with the work
If issues arise with an employee, you follow the process in your employee handbook to document those concerns and, if needed, use a performance improvement plan. Ensuring good documentation helps protect the company should an employee file a wrongful termination lawsuit.
With an independent contractor, you are paying for a defined deliverable and should have very little influence on the means and methods to get there. If there are problems with the deliverable, then you don’t renew the contract or terminate it early according to the written terms of the contract. Having conversations around coaching and job performance or time management begins to blur those lines. If those types of conversations are regularly happening with a contractor, it’s time to reevaluate how the position is classified.
Our communication with an employee or a contractor reflects the nature of the relationship between them and the company. Getting these designations right from the beginning is important. In cases of audits or lawsuits related to unemployment benefits, companies who have incorrectly classified employees as independent contractors risk large fines and payments. To reduce that risk for your company, be sure that you are classifying and communicating with your employees and independent contractors correctly.
If you need help with your people strategy and ensuring proper classification of employees and independent contractors, reach out to the WhyHR team today.
