Employees vs. Independent Contractors: What You Need to Know as Your Business Grows

Image: "We're Hiring" sign against computer keyboard

Presented by Lisa McCormack, Principal with Affogato HR Consulting LLC at the Coast Women in Business meeting on August 9, 2018


Agenda

  • How Do We Work Today?
  • Types of Workers
  • Employee Benefits
  • Compliance
  • Q&A

How Do We Work Today?


Types of Workers

Who Does the Work?

  • Employees
    • Regular, temporary, part-time, and full-time
  • Interns
  • Volunteers
  • Independent contractors

What Is an Employee?

  • Definition: a person who is hired to provide services to a company on a regular basis in exchange for compensation and who does not provide these services as part of an independent business. An employee contributes labor and/or expertise to an endeavor of an employer and is usually hired to perform specific duties.
  • Employees are defined under the Fair Labor Standards Act (FLSA) as persons whose activities are controlled or directed by an employer and who work necessarily and primarily for the employer’s benefit.
  • Most US employment relationships are “at-will” so can be terminated at any time, with or without cause, and with or without notice, by either the employer or the employee.
  • Employees must be paid at least minimum wage in the city/state where they work.
  • Subject to wage and hour regulations and other state/federal employment laws.
  • Can be paid hourly (subject to overtime regulations).
  • Can be paid salaried (exempt from overtime) but must meet exemption tests under the Fair Labor Standards Act (FLSA) and must be paid at least 2X minimum wage.
  • Subject to some mandatory benefits.

Regular vs. Temporary

  • Regular employees are hired for an indefinite time
  • Temporary employees are hired on a temporary basis, possibly based on the length of a project or when there is an increase in business

Full-time vs. Part-time

  • There is no single legal definition of part-time vs. full-time, but 30 hours per week is becoming a common standard for full-time
  • Full-time employees generally work between 30 and 40 or more hours per week and are usually eligible for all benefits provided by the employer
  • Part-time employees generally work less than 30 hours per week and may receive only mandatory benefits

Interns

  • Interns are persons who work as apprentices or trainees in an occupation or profession to gain practical experience
  • Paid
    • Interns classified as employees would nearly always be considered hourly nonexempt employees who must be paid at least minimum wage and overtime pay
  • Unpaid
    • Students receiving college credit OR
    • The training is for the benefit of the students/trainees and the employer gets no benefit (and may actually have its operations impeded at times).
    • The trainees/students do not displace regular employees but work under their close supervision.
    • There’s no expectation of a job at the end of the training period.
    • The employer and the students/trainees understand that the students/trainees are not entitled to wages for the time spent in training.

Volunteers

  • Definition: a person who performs a service willingly and without pay.
  • People who volunteer his/her services for a public service, religious, or humanitarian non-profit organization without expecting pay are not employees.
  • If you are a for-profit entity, people who perform work for you are generally employees, regardless of their age, and you must comply with labor laws.
  • A person who is offering to work for nothing simply to gain experience in the field is an employee, not a volunteer.

What Is an Independent Contractor?

  • An independent contractor is a self-employed individual, business, or corporation that performs a service for an employer under an agreement and who is not subject to the employer’s control, or right to control, regarding the method and means in which the service is performed.
  • Independent contractors retain control over their schedule and number of hours worked, jobs accepted, and performance of their job. They may have a major investment in equipment, furnish all their own supplies, provide their own insurance, repairs, and all other expenses related to their business. They pay their own employment taxes.
  • They may also perform a special service that is not in the normal course of business of the employer.
  • Contractors have a contract specifying terms of work so termination of the relationship must follow contract terms or one party will be in breach of contract.


Employee Benefits

What Are Mandatory Employee Benefits?

  • Worker’s Compensation Insurance
  • Unemployment Insurance
  • Social Security and Medicare
  • Paid Sick Leave
  • State Disability Insurance (employee-funded)
  • Time Off –not mandatory (vacation, holiday, PTO)

Typical Benefits and Costs

  • Medical ($600 / $1,800)
  • Dental ($60 / $160)
  • Vision ($10 / $25)
  • Life ($10)
  • Disability ($15)
  • Flexible Spending Account or FSA ($5 + annual fee of $750)
  • Retirement Savings ($1,500 annual + investment fees)
  • Employee Assistance Program or EAP ($2 or included with medical/disability)

Do I Have to Offer Health Benefits?

Reasons to offer health benefits:

  • Protect, attract, and retain employees
  • Available with a minimum of one non-owner W2 employee
  • Limited-liability companies (LLCs) can get group benefits as long as at least one member is enrolled
  • Guaranteed availability (one week of payroll) and renewability
  • Small group medical rates regulated (1-100 employees in California)

Compliance

Determining Contractor vs. Employee Status in California

  • The old way (Borello common law test) before April 30, 2018:
    • The nature and degree of control exercised by the employer (primary factor)
    • The extent to which the work is integral to the employer’s business
    • The relative investments in facilities/equipment by worker and the employer
    • The extent to which worker was engaged in a distinct occupation or business and the skill required in the particular occupation.
    • Whether the worker’s managerial skills affect his/her opportunity for profit and loss
    • And a few others: length of time, permanence, and method of payment
  • California’s Supreme Court on April 30, 2018 adopted a test for independent contractors that generally assumes workers are employees (DynamexvOperations West, Inc. v. The Superior Court of Los Angeles County, No.S222732)
    • Modeled after Massachusetts Independent Contractor Statute—strictest in the country

Currently, the ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if ALL three prongs of the test are satisfied.

  1. that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
  2. that the worker performs work that is outside the usual course of the hiring entity’s business; and
  3. that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

Who Cares About Worker Classification?

What Are My Options If I Don’t Want to Make Someone an Employee?

  • Use a payrolling company
    • Cost is typically about 20% of pay (e.g., $20/hour rate –you pay them $24/hour)
    • Payrolling company acts as the “Employer of Record”
    • Takes care of employment taxes, workers compensation, and basic Affordable Care Act (ACA) compliance benefits plan
    • Most offer upgrades on health insurance and offer 401K plans
    • Is considered a co-employment relationship between your company and the payrolling company

Compliance: What Laws Apply to Me?

See Employment Law Overview.


Q&A

Let’s work through some examples.

Example #1

Company A runs an HR consulting business, but does not offer stand-alone employee handbook project work. Company A identifies an independent contractor who provides stand-alone employee handbook services. They offer these services to other clients. They have their own tools and templates.

Should Company A engage with this person as an independent contractor to provide these services to their clients?

Example #2

Company B runs a massage business. It currently has no employees or contractors. Company B wants to hire a therapist who specializes in deep tissue massage. Mary, a newly certified massage therapist, is interested in working with Company B.  She has no current clients and doesn’t own a massage table.

Should Company B hire Mary as a contractor? Or as an employee?

Example #3

Company C is a technology start-up company. It currently has five full-time employees. Company C needs someone to create their website, monitor their social media, and act their marketing department. They would like this person to have a company email address and business cards. John is an independent contractor with his own business. He has multiple clients and has been in business for 10 years.

Should Company C hire John as a contractor? Or as an employee?


Thank you for inviting me to speak today!


About the Presenter

Lisa McCormack has spent over 30 years as a human resources (HR) practitioner and leader, working with large and small companies undergoing rapid growth and change. Certified as a Senior Professional in Human Resources (SPHR) and a Strategic Human Resource Management Senior Certified Professional (SHRM-SCP), she holds a Bachelor’s degree in industrial and organizational psychology from San Jose State University. Lisa is a principal at Affogato HR Consulting, which works with businesses to implement practical, appropriate, and compliant HR solutions.


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