Worker Classifications - What Small Businesses Need to Know

Photo shows a pair of workers on a busy construction site

Misclassifying workers as independent contractors when they should be classified as employees can have serious financial and legal ramifications for businesses of all sizes. In 2017, the hardware chain store, Lowes, settled a $2.8 million worker classification lawsuit which claimed that Lowes had improperly classified installers as independent contractors when they were actually employees, and that this misclassification caused workers to miss out on workers' compensation benefits, liability insurance, and caused the workers to pay employment taxes that they shouldn't have been responsible for.

There are distinctions between independent contractors and employees, and the following points can help small businesses understand these differences.

The IRS has four worker classifications:

Independent Contractor - An independent contractor controls the kind of work they do, where they complete the work, and how the work is completed. The business that hires an independent contractor only controls the result or product. The business may set deadlines; businesses cannot set specific working hours.

Employee - If a business controls where, when, what, and how work is completed, then the worker is an employee.

Statutory Employee - Some workers who would normally be independent contractors can sometimes still be considered an employee by the IRS:

• Workers who work from home under specific instructions, with materials or tools provided to them by the business that must be returned to the business;

• Food and beverage delivery drivers (milk excluded);

• Commissioned laundry and dry cleaning drivers;

• Insurance agents working primarily for one life insurance company selling life insurance or annuity contracts;

• Full-time traveling salespersons submitting orders directly to the business from other businesses or wholesale establishments.

Statutory Nonemployee - Some statutes deem some workers who would otherwise be considered employees as nonemployees, and includes:

• Direct sellers and real estate workers who are not paid on an hourly basis;

• Companion sitters (private duty nurses and home health aides) not employed by a placement service.

It can be difficult to determine how to classify some workers in some circumstances.  The IRS provides a form you can complete and send to them that allows the IRS to determine a worker's classification. The form, called Form SS-8, can be downloaded from the IRS web site and includes detailed instructions for filling it out; however, it can take the IRS up to six months (or more) to get back to you. Your Small Business Legal Subscription allows you to bypass this process and consult your attorney for advice on proper worker classification.

State Regulations

Some states may classify workers differently than the IRS. It is extremely important to understand your state's regulations and how they impact your worker classification for your industry.

As you can see, being able to contact a dedicated, experienced employment lawyer can be priceless when navigating employment classification, and with our Small Business Legal Subscription plans, you, too, can have a small business lawyer "on retainer" for advice, questions, contracts, and more! Learn more here or sign up today!