Increasingly, despite the economy, businesses are turning to temporary workers as a way of getting the job done. In fact, by 2020, more than 40% of the US workforce will be free-lancing. That’s nearly 60 million people and it’s pretty easy to see why. Not only is it easy to hire temps as needed, or as revenue allows, they are also typically exempt from benefits and payroll tax withholdings, costing an employer less than a full or part-time permanent worker.
Unfortunately, many business owners don’t really understand the legal difference between a temp and an employee. According to one Department of Labor (DOL) study, 30 percent of employers misclassify workers. It can be a costly mistake, especially as the IRS, DOL ,and state governments are increasingly sharing information to crack down on the problem.
While you should always consult a professional when determining the status of any employee, consider the following basic differences between temporary workers/independent contractors and regular staff.
- If you control how, where or when the individual performs assigned tasks, he or she is an employee, not a temp worker.
- If you provide the tools needed to perform assigned tasks (including office space, computer or software) the workers is an employee, not a temp.
- If you prohibit the individual from performing the same tasks for other businesses, he or she is an employee, not a temp worker.
- If the assigned tasks completed by the individual are key aspects of your business, the IRS may consider him or her an employee rather than a temp worker.
In the event that a classification dispute goes to court, many take the following considerations into account:
- What degree of control does the worker have over assigned tasks?
- What is the worker’s risk of loss?
- Who pays for supplies and equipment?
- What types of skills are required to perform the work?
- Is the work temporary in nature or indefinite?
- Is the worker an integral part of the business?
While a written contract doesn’t provide guaranteed protection if you’ve misclassified an employee as a temp worker, it is better than an oral agreement should the IRS or courts get involved in a dispute. Make sure you include a description of the services to be performed, payment arrangements, who is responsible for expenses, who will provide materials, a statement that this is an independent contractor/temporary worker relationship, a statement that the worker is responsible for his or her own state and federal income taxes, the length of the project, any circumstances under which you may terminate the agreement, and how you will resolve disputes.