If They Work Like An Employee, They’re an Employee (Not an Independent Contractor) in Business and at Work

As we all get ready to distribute W-2 forms to employees and 1099 forms to contractors this month, I recently had the opportunity to speak before a group of small employers who have been in business less than 5 years, who each have 10 employees or fewer, and who all use independent contractors (1099 contractors, non-employees) to accomplish the work of their respective businesses. As New York state-based businesses, I knew that reviewing the bright-line distinction that the New York state Department of Labor (as well as the Internal Revenue Service) makes between what defines an employee and what defines an independent contractor (1099) would be a lively source of discussion during my presentation.  And it was.

“He prefers to work as an independent contractor,” one business owner remarked. “He asked me to make him an independent contractor, I didn’t ask him.”

“She doesn’t want taxes taken out of her pay, she prefers to work as an independent contractor,” another business owner said. “It’s her choice.”

“I hear what you’re saying,” I replied. “However – even if they fill out a W-9 and sign a consulting agreement, it all gets thrown out the window when their work ends with you and they decide to file for unemployment compensation.” The room suddenly got quiet. “I’m not trying to rain on your parade,” I continued in response to the suddenly somber mood. “I’m trying to save you some time, money and aggravation. Because in that scenario, not only will the New York state Department of Labor come after you for unpaid employment taxes – they will also audit your employee records and levy fines for the unpaid unemployment taxes and anything else illegal they might find.”

I then showed the group the very specific definition that the New York state Department of Labor requires for a valid independent contractor (and not an employee), available on their website:

Independent contractors are free from:

  • Supervision
  • Direction and
  • Control in the performance of their duties.

They are in business for themselves, offering their services to the general public.

Signs of independent contractor status include a person who:

  • Has an established business
  • Advertises in the electronic and/or print media
  • Buys an ad in the Yellow Pages
  • Uses business cards, stationery and billheads
  • Carries insurance
  • Keeps a place of business and invests in facilities, equipment, and supplies
  • Pays their own expenses
  • Assumes risk for profit or loss
  • Sets their own schedule
  • Sets or negotiates their own pay rate
  • Offers services to other businesses (competitive or non-competitive)
  • Is free to refuse work offers
  • May choose to hire help.

An employer-employee relationship may exist regardless of how the hiring party describes it. For example, if you give a worker a 1099 Form rather than a W-2 Form, they may still be an employee. Persons who work for you may qualify as employees under the law, even if, for example:

  • You have the person sign a statement claiming to be an independent contractor
  • They waive any rights as an employee
  • You require them to obtain a DBA in order to work for you.

Under the Unemployment Insurance Law, an agreement by employees to waive their rights under the law is not valid.

Remember that the real distinction between the employer-employee relationship and the independent contractor relationship depends primarily on the level of supervision, direction and control exercised by the person engaging the services. It is not defined by what the relationship is called by the participants.

How will you maintain the bright-line distinction between an employee and an independent contractor to protect your company’s reputation and bottom-line, in business and at work?

Payroll File Contains Employee Timesheet Records

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