A quick reference guide to interacting with marketing, digital and creative contractorsJuly 2020
Resource needs can change quickly – and as a hiring manager, it can be beneficial to work with contractors to help with both immediate and long-term needs. Likewise, as a contractor, it can be beneficial to receive continuous project-based work. Whether you’re a hiring manager or a worker, it’s important to know that there are specific rules for working contractors. These rules need to be followed in order to avoid legal issues or lawsuits. At True Talent Group, we’re here to help explain and guide you through some of the basics.
What is misclassification? And are there risks to it?
Misclassification is the idea that employers hire employees and treat them like contractors – or hire contractors and treat them as employees. And in Minnesota, there can be real risks that turn in to big consequences if you find yourself in a misclassification lawsuit. Lawsuits will cost your company (financially and reputation-wise) and make it challenging to fill resources in the future.
Misclassification lawsuits are on the rise on both the state and federal level. Why? Because when workers are misclassified, the government is unable to collect certain taxes and other revenues. Lawsuits are often brought on by independent contractors who feel they’ve been treated like employees and sued for unemployment insurance (UI), stock options, overtime pay, retirement benefits and more.
Here are some examples of recent misclassification lawsuits:
- Microsoft agreed to pay $97 million to settle the class-action lawsuit brought on by temporary employees who said they were denied benefits.
- United Parcel Service (UPS) settled an $18 million lawsuit after workers claimed they had been misclassified as exempt employees.
- Coca-Cola paid $20 million to settle a California misclassification lawsuit.
- Farmers Insurance paid $90 million to claims adjusters for failure to pay overtime.
How can I accurately tell my employment status?
The IRS does a 20-factor test to help companies (or individuals) determine their employment status. While this test can be helpful, it doesn’t always provide all the right answers. Here are some examples of what’s asked in the IRS test:
- Does the employer dictate where, when and how work is done? (5224.0330)
- Does the worker work at a company location? (5224.0330)
- Does a worker work for another company? (5224.0330)
- Does the company provide most of the worker’s tools and supplies? (5224.0330)
According to Minnesota administrative rule 5224.0330, “The most important factor in determining whether a person is an independent contractor is the degree of control which the purported employer exerts over the manner and method of performing the work contracted. The more control there is the more likely the person is an employee and not an independent contractor.”
As a hiring manager, how do I know if I’m at risk for a misclassification lawsuit?
It’s critical that as a hiring manager, you have some knowledge on employment law in your state so you can properly prepare and avoid potential lawsuits. Think about your most active contractor. Here are just a handful of questions to ask yourself:
- Do they go to company-wide meetings?
- Are they expected to work specific hours?
- Do they receive a holiday bonus?
- Do they get approval from you for time?
- Do you give them a performance review?
If you answered yes to any of the above, you ARE at risk. You can work with True Talent Group to make sure you avoid risks and set yourself up for success. True Talent Group is Certified Staffing Professionals (CSP) certified. Make sure to follow these rules:
1) If you are not going through a staffing firm, be sure you are classifying contractors (often referred to as 1099-ers based on the IRS 1099-MISC) correctly:
• They must be set up as a legal company (LLC, S-Corp, etc.)
• They should have a federal tax ID number
• They need to carry their own business insurance and be able to provide you with a copy of professional liability/errors and omissions insurance
2) If you are hiring a W2 employee, you:
• Must pay withholding
• Are subject to EEO, FLSA and other regulations
• Are responsible for paying all taxes to all entities
How can I check in with the IRS on employment status?
Both workers and companies can submit Form SS-8 to get a determination of employment status from the IRS. Just note that the process takes six months (5224.0340).
How can I take a better approach and protect myself?
It can be difficult to navigate the differences between independent contractor status and employee status. Using a staffing firm with an internal employment compliance program will automatically help determine and document that the worker is an independent contractor.
Remember: if the employer has greater control over the worker, that suggests an employment relationship. If the worker has greater control over what they do, that suggests they are acting as an independent contractor.
Protect yourself and come to True Talent Group when you have questions.