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Are My Workers Employees or Independent Contractors?

October 31, 2012

The question is simple enough. You have people whom you "employ" to perform work for your business. Are they technically your employees, or do they fall into a similar category as independent contractors? It may seem like a matter of semantics, but any Sacramento business attorney would caution you that the technical classification of those who perform work for you can have a tremendous impact on your business's legal exposure.

Unfortunately, there is no settled definition of what makes an independent contractor different from a typical employee. Their classification depends on a number of different factors, some of which can vary by jurisdiction. Moreover, there is no single factor that trumps all others in making the determination.

Generally speaking, independent contractors engage in a business that is distinct from your own, even if you both perform substantially similar work functions. An independent contractor likely operates under a different name than your own, likely has multiple clients, and advertises his or her business services independently from your own. He or she typically works his or her own hours, is not subject to your direct supervision, and utilizes his or her own tools or workspace. An independent contractor would likely provide you with an invoice for the value of the services performed. Some common examples of independent contractors include: attorneys, doctors, engineers, architects, construction contractors, and accountants. However, the classification is not limited to these listed service providers.

By contrast, a formal employee of your business is internally supervised, uses tools and workspaces owned and provided by the business itself, and is paid as part of the payroll for the business. The employee does not perform work for another company unless it is the nature of the business to take on other businesses as clients. In these situations, the work is considered to be performed for the parent business rather than for the client business. A formal employee works the hours prescribed by the business, and is not paid on a per-project basis.

Why is this distinction important? Because state and federal laws impose tighter restrictions on the interactions between a business and an employee as opposed to a business and an independent contractor. For example, businesses are required to provide formal employees with regular meal and rest breaks, as well as workers compensation benefits. Additionally, businesses must pay certain payroll taxes on every formal employee they hire. The same regulations do not apply to independent contractors performing work for the business. Understanding the difference not only could potentially save the business some money, but could mitigate the business's exposure to costly fees, penalties, taxes, and potential litigation.

For these reasons, a thorough examination of your business's employment structure may be a worthwhile endeavor. Sacramento business lawyers are adept at evaluating whether a court would be likely to classify a particular worker as an employee or an independent contractor, and can help explain the legal consequences of such a classification. Don't leave your business's legal and financial future to chance. Don't venture your best guess. Do contact an attorney for guidance.

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