Thursday, September 19, 2013

Employee vs Independent Contractor -ensure you are in compliance when hiring for your company

We have recently hired a young gal who previously worked for a local competitor. During her interview she mentioned that she was paid the same wage we were hiring her at, but that she was responsible for paying her own taxes. So I asked her if she had her own business license for cleaning and she said "no". Red flags instantly started going off in my head, as I was listening to her story, because I knew that this other business was doing thing illegally. Now I'm not an Human Resource professional, in the sense that I have a degree in HR, but I have been hiring people for twelve years and I know that hiring Independent Contractors can be risky business if you do not do it by the book.

Here is a list of questions to ask yourself, as a business, to ensure that you are actually hiring someone as an independent contractor and not as an employee.

*Information obtained from the State of Washington Department of Labor.

Is Your Subcontractor Really an Employee?

Take the "Six-Part Test" below

A “yes” answer to all six questions usually means the worker has a business of his/her own, and you are not responsible for workers’ comp premiums, unemployment tax or wage and hour requirements.

  1. Supervision
    1. Do they perform the work free of your direction and control?
  2. Business office
    1. Do they maintain and pay for a place of business that is separate from yours? A cell phone and a truck is not enough. You need to visit his or her place of business and make sure. 
  3. Previously established business
    1. Do they have an established, independent business that existed before you hired them? Evidence may include other customers or advertising. 
  4. IRS taxes
    1. When you entered into the contract, was the contractor responsible for filing a business tax return with the IRS for his or her business? 
  5. Maintains books
    1. Do they maintain a set of books dedicated to the expenses and earnings of the business? You can ask to review them for your protection.
  6. Required registrations
    1. Are they up to date on all required registrations and accounts?
      1. UBI number? Check Washington State Department of Revenue tax registration account. 
      2. Contractor registration number (RCW 18.27), electrical contractor license (RCW 19.28.061) or elevator contractor license (RCW 70.87.240)? Check L&I's Look Up: Contractors or Tradespeople application.
    2. If they have employees, do they also have these required accounts?
      1. Unemployment insurance account with Washington State Employment Security Department? Call 360-902-9360.          
      2. Workers' Compensation account with Washington State Department of Labor & Industries? Check at Verify Workers' Comp Premium Status.

Note: If you plan to treat your worker/subcontractor as an independent, make sure you can prove it. You may always ask the person you are hiring to see the above documents.

Did you answer “yes” to ALL SIX questions on this page?

Then they are a contractor, and usually you will have:
  • No workers’ compensation premiums due.
  • No wage and hour requirements.
  • No unemployment tax.

Did you answer “no” to ANY of the six questions on this page?

You usually DO have to do the following for the worker(s) you are hiring, since they are NOT independent contractors.

Many companies are tempted to hire independent contractors, and not employees, as it saves them time, money and headaches but most companies do not ensure they are doing things legally. The other business, my new employee worked for, was definitely not in compliance and, if she reports them, could get in serious trouble.

So, don't make the same mistake and ensure your "Independent Contractor" is truly an independent contractor and not an employee.  


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