Correctly classifying a worker as a W2 employee or as an independent contractor is very important to any business. If misclassified, the business may be facing fines, tax penalties and possibly overtime payments. Misclassifications can cause significant financial issues for any business.
As an example, most recently, there was a company in Texas that misclassified 430 technicians as independent contractors when they should have been employees. This was decided on a number of factors, including, but not limited to, after examining what the technicians were doing, the number of hours they were working, the locations they were providing services and how they were each being paid,
After completing the examination of this company, it was determined by the U.S. Department of Labor that the company was in breach of wage and hour division. They were denying these workers rights and benefits that they were guaranteed under the Fair Labor Standards Act. The company was charged $1.5 million dollars in overtime wages and damages for their misclassification of their workers. This is a significant monetary loss, which could have easily been avoided.
To prevent this from happening to you, it is important to understand who can be an independent contractor and who is required to be an employee. An independent contractor is someone who comes in to provide specialized services on days of their choosing. They are not under the control of the business and they are only providing very particular services to the patients or to the clients of the business.
Independent contractors are paid solely based upon the services rendered, and nothing else. They are not entitled to benefits, bonuses and raises. They bring their own equipment and their own assistance in order to provide the services to the patients of the business. They generally have their own legal entity, which supports that they are a separate business apart from the business that they are providing these specialized services to.
However, independent contractors may also be individuals, but they must fit into the above criteria to be considered independent contractors under the law.
If an individual is working at the request of the business, on days and hours at the request of the business, utilizing the materials, supplies, or staff of the business, then they may not be considered independent contractors but employees of that business. If the business has any control over the individual, that will almost always challenge a classification of independent contractor.
If the contractor should have been an employee, as indicated above, the business may then owe overtime payments, depending on the type of services being rendered and how they were paid. Overtime wages are calculated for any hours worked over 40 hours per week. Just like the classification of workers, there are certain limitations and rules regarding whether they are entitled to overtime pay, including, but not limited to, how they are paid, what their salary is, what type of services they are providing, whether they manage anyone in the business.
Before determining to hire anyone for your business, the owners should first decide on whether the individual is truly an employee or contractor and whether they would be entitled to overtime payments based on the services they are providing to the business. This determination can save the business thousands, if not millions of dollars if done correctly.
If you do have any questions or any concerns about your own business or hiring new workers, reach out to your attorney, your CPA or someone who can assist you in confirming you are classifying your workers correctly under the law and thus avoiding any potential fines or penalties in the future.
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