Congratulations, your small business has grown and it’s time to hire some help.  Now, you’re thinking…I can save some money if I just classify my new hire as an independent contractor, instead of an employee.  However, what saves you a few dollars today can cost you thousands in the future.  For an employer, the consequences of misclassification of an employee as an independent contractor can include: significant tax, wage, and benefit liabilities, as well as unanticipated liability to third parties for injuries caused by an employer who is classified as a contractor.

Face it, employees aren’t cheap, in addition to the burden of calculating taxes, withholding taxes from the employees’ paychecks, filling out employer tax forms, and paying monthly and quarterly tax payments, there is also the expense of having to pay the employer’s portion of the withholding tax, paying unemployment insurance and workforce training taxes to the DUA.  Moreover, depending on the size of your workforce, must also offer health insurance and follow all employment laws such as minimum wage, overtime, mandatory breaks and numerous other employee rules established to protect workers.

The simple alternative would be to simply classify a new hire as a contractor, pay them a salary, or hourly and let them deal with their own taxes and insurance.  However, it’s not that simple; while almost anyone can be considered an employee; the state and federal government have rules about who can be considered contractor.

Who Can Be a Contractor

Massachusetts law presumes an individual is an employee unless the individual (i) is free from the employer’s actual control and direction; (ii) the service they perform is “outside the usual course of business of the employer”; and (iii) the contractor is “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.” M.G.L. c. 149, § 148B.

For example; if you own a Plumbing company, and you hire a plumber and tell him what time to show up and what time to leave, then he cannot be a contractor.  However, if you hire an electrician to wire an outlet for a new washer and dryer you just plumbed, then the electrician is a contractor.

Consequences of Misclassification

A company that fails to pay minimum wage or overtime because it misclassified a worker as an independent contractor faces considerable penalties. In Massachusetts, it is a violation of the Wage and Hour Act and the employer will be liable not only for the amount of unpaid wages and overtime, but damages are automatically trebled.

Moreover, if an employer is found to be responsible for having misclassified workers as independent contractors they may be subject to employment tax liabilities, including 100% of the combined worker-employer contribution under the Federal Insurance Contributions Act (FICA), comprised of both Social Security and Medicare taxes (up to 15.3%) and Federal Unemployment Insurance Tax Act (FUTA) as well as the federal income tax not withheld; penalties; and interest.

Unfortunately, when it comes to employee classification, ignorance is no excuse.  Simply having a misclassified employee is enough to subject yourself to liability, even if you didn’t know you were wrong.

What You Can Do

It’s simple, get educated.  Before you ever hire a single employee; before you hire a contractor; consult with a business’s attorney.  If your business doesn’t have an attorney, then it’s time to break down and get one.  Legal services should be an important aspect of every business’ growth.  A qualified business attorney can help your business spot problems before they become liabilities, and that will save you and your business thousands in the long run.  At Grantham Law, we specialize in working with small businesses in all stages of growth and have several programs that are designed to fit your budget.  Call us today for your free consultation and business review.