Florida Small Business Law

You may have been alerted about the importance of correctly classifying a person performing services for a business as an “employee” or an “independent contractor.”  Since most startups and small businesses are now in full cash-preservation mode (even more so than usual), a discussion about the proper classification of workers is timely and may help your company avoid costly surprises that result from the misclassification of a worker as a non-employee.

Background:

Startups often choose to hire a worker as an independent contractor rather than as an employee.  The independent contractor relationship may be advantageous for both the worker and the company:  the worker may desire to retain autonomy and flexibility; the company may seek certain expertise possessed by the worker that its employees do not have.  Often, however, a business engages a worker as an independent contractor rather than as an Employee because the business expects to avoid the costs and responsibilities associated with the typical employer-employee relationship, most notably, unemployment taxes, workers’ compensation insurance, and wage withholding responsibilities.  Businesses also save from not having to provide independent contractors with health benefits, which are a significant burden on small businesses.

A business cannot, of course, simply classify all workers as independent contractors. Doing so just might simplify the complicated administrative processes of running a business to the point where one might be able to focus on the business itself and not the administration. Humor aside, classifying everyone as an independent contractor would deprive the system of tax revenue and thwart labor laws meant to protect employees.  As a result, the improper classification of a worker can have serious legal consequences for a business.  Again:  the failure to properly classify workers can financially destroy your business. If a business makes an error in classifying workers, the business will be liable for employment taxes, interest, and penalties, and may also be subject to claims for violating state and federal labor laws.

Enter the IRS:

The key factor in determining whether a worker should be classified as an employee or an independent contractor is control:  who has control over how the worker accomplishes the work.  Because this determination is sometimes unclear, the Internal Revenue Service has developed a set of factors that employers should use to determine whether a worker is an employee or independent contractor.  These factors are grouped into three categories:  Behavioral Control (http://www.irs.gov/businesses/small/article/0,,id=179111,00.html), Financial Control (http://www.irs.gov/businesses/small/article/0,,id=179113,00.html), and Type of Relationship (http://www.irs.gov/businesses/small/article/0,,id=179116,00.html).  The IRS will determine the classification for you if you are still uncertain (use IRS Form SS-8 (http://www.irs.gov/pub/irs-pdf/fss8.pdf)), but be forewarned that the IRS’s determination may take up to six months.

Your trusted attorney should be able to advise you regarding the employee/independent contractor distinction, and, if necessary, prepare an Independent Contractor Agreement that outlines the terms of the engagement and further documents the nature of the worker’s relationship with your company.

Volunteers and Interns

Can businesses control costs by using volunteers or interns?  Free labor always seems good, right?  Not so fast.  If you intend to engage volunteers or interns, then your company will subject itself to both legal and financial perils, namely the same federal and state labor and tax laws relevant to traditional employees.  Using unpaid volunteers in a for-profit enterprise is inherently suspicious, and using unpaid interns must comply with a very limited exception under federal and state wage and hour laws.  Consider the following:  could your business withstand claims for unpaid wages and benefits from volunteers and/or interns, whose relationship with your company has soured?  Suddenly, the savings derived from using inexpensive labor is no more, and your business may in fact have incurred additional costs and penalties.

As businesses look for creative ways to control expenses and survive during challenging economic times, independent contractors, volunteers, and interns are seemingly practicable options for reducing labor costs.  Because of the significant legal and financial consequences of improperly classifying workers, however, business owners and managers should take care to properly designate workers in order to avoid unanticipated and debilitating financial penalties.