What you need to know about hiring Independent Contractors and Employees
HIRING INDEPENDENT CONTRACTORS
These days, many small businesses and not so small businesses use independent contractors. Usually this is done to save on employment taxes as well as not having the responsibility of a full-time employee. An independent contractor is one who contracts to do a piece of work according to his own methods and is subject to his client’s control only as to end product or final result of his work. An independent contractor is a person who contracts with another to do something but who is not controlled by the other or subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking.
When hiring an independent contractor, you must determine what type of help you need and the specific skill level of this individual or company. When hiring a company, things are a little easier because both parties understand that this is a temporary relationship. This means that at some identified point the job will come to an end; or that the parties understand that there is one specific task that company in hired to do. With individual’s things are more complicated, mainly because the hiring business does not make the relationship clear. Also, hiring businesses fail to provide the proper documentation and take the necessary precautions to prevent confusion. Neither the IRS nor the Texas Workforce Commission (TWC) recognize “contract workers,” only “independent contractors.” The IRS has twenty-part test to determine if someone is an employee or an independent contractor.
It is imperative that you have a written contract with your independent contractor. The contract must set out the service of the contractor and the terms of the agreement. This agreement should be for a certain amount of time. Do not make it indefinite. It should clearly identify the services of the individual and the purpose for which he or she is being hired. If this is an individual that you are contracting with, you must specify that this person is an independent contractor and that the business will not pay taxes on the contractor’s behalf.
I once had a client that came to my office who owned a janitorial service. She had “contract workers’ that she often referred to as “employees.” She often had her workers go from one job to another, building to building, paying only for the time that they cleaned. One worker who was released from duty was upset by this and filed for unemployment. TWC found that this worker was an “employee” and was entitled to unemployment. The IRS became involved and found that the business should have paid employment taxes on this worker and charged the business for past taxes plus penalties and interest. If that was not enough, the U.S. Department of Labor became involved and found that the business (now deemed employer) did not pay proper wages in accordance with the federal laws and ordered the business to pay overtime to all employees who had worked during a one-year period.
PAY THE PIPER AND YOUR EMPLOYEES
One of the most common mistakes that employer’s make is not correctly paying their employees. In addition (as mentioned in a previous article) employer’s fail to properly classify and pay taxes on those employee’s as well. Once you have hired an employee, you must pay them consistently and in accordance with federal laws.
As an employer you should become familiar with the laws governing the wages of employees or at least hire someone who is. The Fair Labor Standards Act is the federal law that mandates the wages of employees and set the minimum wages and governs overtime as well. Your State Workforce Commission or Unemployment Office is the state government agency charged with overseeing and providing workforce development services to employers and job seekers. The Workforce Commission offers recruiting, retention, training and retraining, and outplacement services, as well as valuable information on labor law and labor market statistics. In addition, The Workforce Commission handles employee claims for unemployment and unpaid wages.
You must ensure that as an employer you are paying your employees at least minimum wage and for the time that they have worked. You should ensure that you have a proper method of tracking your workers time to keep in a file. If the employee works more than 40 hours in a workweek (as defined by the company) then you must pay that employee overtime (with some exceptions). As a small business owner, you may face problems paying workers on time. While there is some room for an employer to delay payment for a small period of time, you must pay such employees for the time worked. Failure to pay your employees can lead to them filing a claim with The Workforce Commission. The Workforce Commission will hold you liable for wages earned and not paid to your employees and can penalties and interest for failure to pay.
The worst thing an employer can do is fail to pay its payroll taxes. Business owners are required to withhold payroll taxes from employee’s wages, and they have a fiduciary responsibility to pay the amounts withheld over to the IRS. The IRS takes a hard look at any business, which gets behind in paying payroll taxes or fails to pay the payroll taxes. Any business owners who find themselves behind in paying their payroll taxes should consider that the IRS may consider this a criminal act and the officer and directors of a corporation may find themselves before a Federal Grand Jury. Business owners who take action to remedy these situations before IRS agents show up at the business door will always be in better shape to save their business and their personal freedom. Often business owners faced with a payroll taxes do nothing. This is the worst thing you can do! Instead acknowledge you have a serious payroll problem and immediately start moving forward to solve it. Do not wait for an IRS agent to stick a badge in your face to wake you up.
GET YOUR EMPLOYEES ON THE “GOOD FOOT”
One of the major things that I discuss with my client is ensuring that their workers have a clear understanding of their duties and responsibilities at work. Often times, as small business owners, employers fail to provide such information to their employees. Job descriptions are a good way to provide written information to employees about what you expect from them. This is essential when performance is not in alliance with your expectations. This will assist with cutting down on legal problems latter on when you may have to discipline or fire your employee because of low performance.
In addition, as an employer you want to take the time to obtain an employment manual that sets out the parameters of the work relationship. An employment manual provides information such as work schedules, information on benefits, holidays, paydays and sick days, and can also provide sexual harassment policies, and workplace violence policies. I often recommend that my clients have such manuals in place to ensure that the employees understand how the company is run.
When I have prepared employment manuals for my clients, they are quite surprised by the reaction that they receive when provided the information. Employees are generally well receptive to the manuals and are happy that their company cares enough to take the time to answer questions in writing. Generally, when implementing employment manuals, clients will offer a training that helps their employees understand the information presented in the manual as well as understand how to use the manual in a way that is beneficial to the company as well as the employee.
Now you may think what that has to do with legal matters. Well, many times companies are doomed by employee relations. EEOC claims and lawsuits follow when disgruntled employees leave the company. Having a sexual harassment policy shows that as a company you are interested in the welfare of your employees and will not tolerate such an environment. Having an e-mail policy provides permission and understanding that as an employer, you will, from time to time, monitor your employee’s e-mail practices. This cuts down on those inappropriate office e-mails and online shopping at work.
Last but not lease, having an arbitration policy with your employees can allow the company to save money by not having a legal battle that lasts for years. In those policies you can agree upfront on what costs each party will pay and how the arbitrators will be picked and where the arbitration will be held.
While an employment manual is not a contract between an employer and employee (you must make that clear), it does provide guidelines that must be adhered to by both the employer and the employee. Be sure to have an attorney prepare or review your manual so that you will not unwittingly cast a litigation shadow on your company in years to come.
