The consequences for employers found to have misclassified employees as subcontractors can be severe. If a worker is deemed an employee, the employer may be ordered to pay past employment taxes and other expenses that should have been paid regarding the worker’s income. The following list of questions can be used to determine if your workers are truly independent contractors or would legally be deemed employees. Every question you answer “no” indicates that the worker will be deemed an employee and not a true independent contractor. The exact factors and laws may vary from state to state.
Do the workers…
1) Maintain a separate business with their own office, equipment and other facilities?
2) Have a legal entity (corporation/LLC)?
3) Have a tax ID/EIN number (other than their social security number)?
4) Have their own liability and workers compensation insurance policies?
5) Use their own tools, equipment and supplies?
6) Not wear any clothing containing your company’s name or logo?
7) Not drive your vehicles?
8) Also work for other companies?
9) Comply with registration or licensing rules in your state?
10) Sign subcontracts with you for each job or a master subcontractor agreement covering all work they perform?
11) Not receive payment on an hourly basis, but instead on a commission basis, a per-job basis, per unit basis, or a competitive bid basis?
12) Control the means of performing their work? In other words, do you not tell them how or when to do their work (other than a project schedule with deadlines)?
13) Incur the main (or any) expenses related to their work?
14) Have continuing or recurring business liabilities and overhead such as rent, loans, etc.?
15) Have any financial risk, meaning can they realize a profit or suffer a loss on the work they perform?
16) Remain liable for failure to complete the work properly? Could you sue them for damages related to delays, to correct poor workmanship, or other breach of contract?
Failing one element does not mean a worker would automatically be deemed an employee, but failing more than one element would likely result in employee status. The main goal is for the worker to have (or appear to have) a separate business. If the worker cannot profit or lose, has no recurring business liabilities or obligations, is told what to do and when to do it, and has no downside risk, the worker will be deemed an employee.