An issue that may be confound Idaho employers is determining whether a worker is an employee or an independent contractor. For the reasons discussed below, some employers may be tempted to classify a worker as an independent contractor even though they meet the criteria for an employee, but the legal penalties for misclassification can be severe and should be avoided.
Under both federal and Idaho law, an employer must correctly classify a worker as an employee or an independent contractor. Idaho Code Title 72, defines “employee” as any person who has entered into the employment of, or who works under contract or service or apprenticeship with, an employer. An “independent contractor” is “any person who renders service for a specified recompense for a specified result, under the right to control or actual control of his principal as to the result of his work only and not as to the means by which such result is accomplished.”
If you find this a bit confusing, you are not alone. In essence, employees work under the direction and control of an employer. They work specific days and hours, and there are procedures established by the employer as to how they’re to do their work. Independent contractors generally retain control over the job that is to be done.
A clear example of an employee would be a retail store clerk who works five days a week at set hours under the supervision and control of a manager. On the other hand, an example of an independent contractor would be a subcontractor on a building project, whose job is to install drywall. The drywall installer generally is in control of the work to be done and, when the work is complete, the drywall installer’s job is over. In these examples, the differences between an employee and independent contractor are reasonably clear, but in many employment situations there may be some ambiguity as to the nature of the job and employers may be tempted to classify the worker as an independent contractor.
Why would an employer want to classify a worker as an independent contractor? In brief, because it saves the employer money and time: an employer must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. Depending on the employer, the employer may also offer benefits to employees that would not be available to an independent contractor. Conversely, an independent contractor is subject to self-employment tax, which is not the employer’s responsibility and would not be entitled to other benefits offered to an employee.
Classifying employees is an incredibly tricky concept and can really benefit from the advice from someone who has done it many times before. As a business lawyer, Rick Roberts can help guide you through the process and ensure your business is set up for growth. Because this is such a tough topic to understand fully, stay tuned for part 2 of this blog coming soon.