Blurred Lines: Understanding the Difference Between Employees and Contractors

The question of whether someone you hire to work is your employee or independent contractor can be a potential minefield if you aren’t somewhat familiar with these two different and distinct categories. The minefield that occurs when the lines between the two are blurred and misunderstood can be expensive, in both time and money.

Colorado starts from the presumption that all people who work for someone else are employees and are therefore subject to the laws and obligations that go with that designation. If the desired outcome is have an independent contractor relationship, then it is up to the employer to demonstrate that the relationship is properly structured as an independent contractor relationship rather than an employment relationship. Properly structuring the relationship can be complex and is invariably very fact-based, meaning each individual’s situation must be evaluated on its own to determine that individual’s status. Oftentimes, even if it is evaluated by an attorney, the attorney is only likely able to give you probabilities as to whether a reviewing agency (e.g. state employment agencies, the IRS, etc.) will agree with that analysis.

After all, the IRS, for example, uses a 20-factor test to determine the appropriate classification, with no single factor being necessarily determinative of the relationship. These factors used by the IRS are used to determine whether the party hiring the contractor/employee “controls” the contractor/employee.  If the hiring party does “control” the hired party too much, then an employment relationship is likely to exist.  

Some (but not all) of the key factors in determining whether an employment or independent contractor relationship exists are:

  • Whether the work must be performed by at certain times;
  • Whether the work must be performed at certain places (especially, the hiring party’s premises);
  • Whether the work requires the hired party to dedicate full time services to the hiring party;
  • Whether the work requires use of the hiring party’s equipment, tools, or materials;
  • Whether the hiring party supervises and controls how the work is performed;
  • Whether the hired party is free to work other parties (and in fact does); and
  • Whether the hired party is free to terminate their relationship without incurring liability.

The consequences for misclassifying employees as independent contractors can result in significant penalties and back taxes (e.g., all payroll and withholding taxes not properly withheld and paid) from state labor agencies and the IRS. It can also cause unexpected laws to apply to the relationship (e.g., Fair Labor Standards Act (minimum wage and overtime laws), Family and Medical Leave Act (for companies of appropriate size), etc.). Thus, it is vitally important when seeking out and hiring new people to assist with your venture who you want to classify as independent contractors, to take the necessary steps on the front end to classify them correctly. Above all, it is imperative to recognize that employees and independent contractors are completely different animals that cannot be confused for each other.

Because of the complex and nuanced nature of this question, you would do yourself and your business a great favor by reaching out to the Doida Law Group when deciding whether to hire new talent. Doida Law Group can help craft appropriate contracts for independent contractors and employees that will help properly classify the parties’ relationship.

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