Employee or Independent Contractor? Why Does it Matter?

By: Jacob Davis, Esq.

As most business owners will attest, you are only as good as the people working around you. Most businesses, construction companies, entrepreneurs, housing providers, investors, and general service providers will ultimately have to hire staff to carry out the mission and purpose of the business. One item that is often overlooked is whether to hire an independent contractor or an actual employee to perform the work. Why does it matter and what is the difference between the two?

Why does it matter?

Government organizations, including the United States Department of Labor, generally have enforcement powers regarding employee classification and wage and hour law. But why would an employer misclassify an employee? The practice of misclassifying workers can be both intentional or unintentional. The practice of intentional misclassification generally occurs because employers plan to avoid paying unemployment, overtime, and other taxes on workers, and from covering them on workers compensation and unemployment insurance (i.e. to reduce expenses). Unintentional misclassification may come in the form of just not understanding the law or failing to seek counsel prior to hiring and scaling a business.

Recently, a federal investigation recovered over $133,000.00 in back wages for 63 workers of a Dayton home healthcare provider who allegedly misclassified its employees as independent contractors, denied workers overtime pay, and falsified payroll records to hide the violations.1 Misclassification of workers is common all across the country and can potentially have disastrous consequences for your business. For example, this home healthcare provider is now dealing with the fallout of a government investigation, bad publicity, and the potential of further litigation if other employees are discovered to have been misclassified.

What is the difference between an employee and independent contractor?

Generally, the chief test in determining whether an individual is an employee or an independent contractor is the employer's right to control the manner or means of performing the work. There are several factors that courts will consider when making a determination as to whether the individual is an employee or independent contractor:

1. The worker is regularly engaged in business besides that of the employer and is available to the general public to perform such services.

2. The worker possesses special skill or trade not common to the general public.

3. The worker is engaged by the employer to perform services not ordinarily a regular business activity of the employer.

4. The worker supplies his own tools and materials and hires and controls his own helpers.

5. The worker has a contract for completing a specific job and is paid a lump sum, without deduction of withholding and social security taxes, rather than by an hourly rate.

6. The worker controls the hours worked, the selection of materials, and the quality of performance.

Most courts determine that not any one factor is conclusive. Misclassification is a common issue in business, employment, and labor law; therefore, you need a trusted attorney as you build and expand your business. If you need guidance in Ohio, you can contact Nalls Davis’ Labor and Employment Practice Chair, Jacob Davis, at (937) 620-2137 or book a FREE consultation here.