Are They Contractors or Employees?
Independent contractors and subcontractors are a major part of the construction industry. They are the lifeblood of many companies because they allow you to function with the workforce you need, tailored for every specific job. Because they cover their own licensing, tools and insurance, they cut down on overhead and allow you to function smoothly. It is important, however, to make sure that your independent contractors are not actually employees who are misclassified. Here’s what you need to know about avoiding employee misclassification in the construction industry.
Employee misclassification is a major concern these days. It is all too common, and as a result the IRS is beginning to come down hard on those who engage in this practice. Most misclassification issues are simple errors on the part of employers who don’t understand what constitutes an employee versus an independent contractor. Nonetheless, the penalties can still be harsh and can result in serious liability problems to the tune of at least thousands of dollars in tax payments.
A true independent contractor is self-employed. They control how and where they do their work, and the scope of the work. If you control the worker’s duties and how they are performed, if you determine how they are paid and who supplies tools and equipment, and if the worker performs a key role in your business on an ongoing basis, they are likely an employee and not an independent contractor.
One of the best ways to avoid misclassification problems is to make sure you’re hiring workers who have already incorporated their own business. This provides a solid paper trail that you’re working with another business and not your own employees. When you work with a corporation, you pay the company, who then pays the worker. You are shielded from allegations that you have a relationship with the worker directly.
If you are audited by the IRS, you can use the paperwork to back up your claims that you are working with true contractors. The proof will be there that someone else is paying taxes, benefits and the like, and controlling the scope of work of the employee.
Another option is to hire workers from an employee leasing company. Such employees are temp workers, casual or contingent workers, or contract employees. The term and scope of their employment is set with the company through which you lease them. They, in turn, are paid and get their benefits from that company. They are, in essence, doing work for you while employed by someone else.
The danger of using this kind of worker is that if you supervise them and define the nature and scope of work, you can be seen as a joint employer, meaning they are still misclassified. It is essential when using independent contractors that you do not exercise control over them or their duties.