One of the most challenging parts of human resources management is handling employee compensation. While it might be up to the higher-ups to hire staffers on a full-time or contractual basis, the human resources department is usually the one responsible for handling payroll duties.
Because staffing expenses account for 40 to 80% of a company’s overall budget, many business owners will choose to classify workers as contractors rather than full-time, in-house employees. If organizations hire a contractor to complete a project, the employer is exempt from paying for the equipment needed to get the job done, job training, and a regular salary and benefits.
In short, contract or independent employees perform work for a business that is largely outside the scope of what that company’s focus is. Contractors may be limited in terms of how many hours they can work for an employer and the type of work they do and generally work on a project-by-project basis. For example, a legal firm might hire a videographer on a contractual basis to shoot an advertisement video. The work that the videographer does falls outside of the firm’s specialty – law – but the person shooting the video is still hired by the legal company for their services.
Additionally, contract workers are often referred to as “1099 employees” because the tax laws that affect them are different from “W2 employees.” Contactors are responsible for paying taxes on whatever wages their employers paid them. Independent contractors may also work for more than one client at a time and are by and large self-employed.
Full-time employees, on the other hand, have a more structured classification. Besides being subject to scheduling and performance expectations, full-timers have their taxes reported by their employers and get to reap the benefits of health insurance, 401K contributions, and other perks if their employers offer these incentives.
Unfortunately, many companies have made the mistake of misclassifying their employees, leaving contract workers to suffer as a result. In an effort to decrease spending, these companies will often hire contract workers who really should be classified as full-time employees. This bars contract employees from getting the workplace protections and benefits they’re entitled to, such as a regular paycheck, overtime pay, health benefits, insurance, and much more.
To verify that an employee is indeed an independent worker and not a full-time employee, California business owners are required to administer the ABC Test. This test is comprised of three parts, according to Forbes. To pass, employers must able to affirm the following three statements: 1) the employee is free from control/direction of their employer regarding their work performance, 2) the work done is outside the scope of the business’s focus, and 3) the employee in question regularly works in an independent trade or business of a similar nature of the work done by their hirer. If an employer answers “no” to any of these statements, that employee must be considered a full-time or W-2 worker.
Companies that knowingly misclassify independent contractors are at risk of paying even higher amounts in fines. Early last year, the California Supreme Court made a decision that will cause employers to think twice before deeming a worker an independent contractor.
The popular ride-sharing service Uber is now subject to reevaluating its job classification procedures – a move that could impact all job sectors in the state, according to the Los Angeles Times.
In this case, the court iterated that businesses must prove that contract workers are completing projects outside the scope of the organization’s “core business” before classifying them as independent contractors.
“When a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor … there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification,” Chief Justice Tani Cantil-Sakauye wrote for the case.
Just as employees have a responsibility to give their best to their jobs, employers likewise have a duty to ensure their workers are protected. After all, it’s the law.
RTR Consulting has more than 20 years devoted to developing effective and efficient human resources policies, procedures, and best practices for small, start-ups, and medium-sized businesses. Contact us today if you need help keeping your business running smoothly.