There are a number of factors that determine whether a person is classified as an employee (someone you provide a W-2 tax form) or an independent contractor (someone you provide a 1099 form) and it is important for a business to carefully and accurately weigh these factors in order to avoid misclassification and the legal pitfalls that surround it.

Failing to classify an individual correctly (as an independent contractor rather than an employee) can have significant legal ramifications, including:

  • Mandatory provision of (or back pay) of employee benefits
  • Reimbursement of employee wages including overtime and minimum time
  • Back pay of taxes and penalties for federal and state income taxes, unemployment, Medicare, and Social Security
  • Pay for misclassified injured employees’ workers’ compensation benefits.

Classifying a worker is not as simple as ensuring they meet a specific checklist. There is in fact no set checklist or number of criteria someone has to meet in order to be classified either way.

To determine an individual’s working status the IRS looks at the entire relationship between the payer and the person providing the service.

Factors considered fall primarily into three categories:

  1. Behavioral
  2. Financial
  3. The type of relationship

Behavioral factors include considerations related to “control.” Does the company control what the worker does or how he does it? Financial considerations would relate to whether the payer has the right to control any business aspects of the worker’s operation (what tools they use, how the worker is paid, whether expenses are reimbursed, and so on). And then finally, the type of relationship that exists between the two parties. For example, are there written contracts or employee type benefits (like health insurance?).

In order to determine the correct classification, the IRS says that the key is to “look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”

The hard thing about using independent contractors rather than employees is that classifying them as such requires you understand clearly the difference between the two. There are many ways that you can fall into a misclassification trap.

Writing for the American Bar Association, Robert W. Wood—a practicing lawyer out of San Francisco—says, “The decision whether to hire a worker as an employee or an independent contractor is a significant one with fingers in a large number of pies, with regulations from the IRS, the Department of Labor and employment statutes, and state unemployment insurance authorities. In fact, it is hard to think of a more consequential business decision.”

There are many landmines to avoid when it comes to worker classification.

Indicators that someone should be an employee and not an independent contractor:

  • You don’t have a written contract for work performed.
  • You classify workers with similar positions or responsibilities as W-2 employees .
  • You provide worker’s equipment, tools or supplies to get the job done.
  • You reimburse expenses.
  • You pay by the hour instead of by project.
  • Your employee and independent contractor forms and terminology used are too similar.
  • You direct the worker how to do their job or otherwise control how the work is done.
  • You require someone works set hours or for a set amount of time.
  • You prohibit the worker from also working for competitors.

In general, the law classifies those working for a business as W-2 employees by default. To be classified as an independent contractor, the payer can only direct or control the result of the work, not what will be done or how it will be done. Furthermore, this is not a one-time process. If you are using independent contractors, you need to make sure you are evaluating their status, duties and treatment on an ongoing basis, otherwise you risk a wide variety of expensive legal and tax liabilities.

Limitations of choosing to hire independent contractors

Legal concerns aside, what are some of the limitations of using 1099s? Well, for starters, work produced may be of a lower quality, especially when you consider you cannot legally train independent contractors, or tell them how to do their job.

You will have much less control over an independent contractor and cannot supervise or monitor them closely. This may mean that although the work gets done, it doesn’t get done in quite the way you want it to.

Firing or terminating a relationship with an independent contractor is limited to what is included in the written agreement you draw up with them. If you do anything to violate this agreement you could be in breach of contract.

In the case of employees injured on the job, workers’ compensation usually covers them. If an independent contractor is injured on the job they might be able to sue you to cover damages (as they don’t receive workers’ compensation from an employer).

If you’ve hired a contractor to create work for you, you might not own the copyright to that work unless you have a written agreement transferring ownership of that work.

The benefits of using an independent contractor

We’ve discussed in-depth the limitations of using independent contractors, but what are the benefits?

For starters, flexibility is a huge benefit. When you hire an employee you hire someone who will be on the payroll for the foreseeable future. Independent contractors, on the other hand, can be hired when the business needs more hands than usual. This is often the case with seasonal businesses, or as the business scales.

Furthermore, when you hire contractors you can hire for a diverse range of skills—perhaps skills that you only need access to for a short amount of time—without having to hire full-time employees for every skill in your business.

Hiring someone as an independent contractor first is often a great way to test how they will work with your company. Are they a good fit? Do they have the skills needed to perform the work well and add value over an extended period of time?

And finally, independent contractors can save costs for your company as you do not pay them benefits, you do not pay for their training, and you do not pay for tools, equipment or supplies they may need to get the job done.

How BlueCrew takes worker classification concerns out of the picture

We combine the best of both worlds.

By using workers through the BlueCrew platform, who are all W-2 employees of BlueCrew, you avoid misclassification concerns while still benefiting from the flexibility of a mobile platform that allows you to scale up and down quickly—only requesting workers when you need them—with the added bonus of workers who are actually trained W-2 temps with an interest in doing well on the job in order to advance their career, improve their ratings on the BlueCrew platform, and get asked back again by your company.

Additionally, BlueCrew takes care of training employees and ensuring they have all the skills necessary to do the job. We interview each of our employees face-to-face and conduct thorough background checks.

Because BlueCrew takes on legal responsibility for employees, you truly do get the best of both worlds—that combination of flexibility and reliability. You get access to as many or as few qualified workers as you need, whenever you need them. And you get access to workers who are looking to both build a career for themselves and for regular work.