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Misclassification of Employees as Independent Contractors. What’s the Difference?

As a business owner, the types of personnel you utilize can impact the way you conduct your business and how you compensate the individuals performing work. For instance, there are certain benefits you must provide to hired employees that don’t necessarily apply to freelance workers, outsourced contractors, or interns. For this reason, the Department of Labor may conduct an audit to verify your personnel are functioning in their designated capacity.

When the Department of Labor does determine that an audit of your business is necessary, you’ll receive a letter. This will provide you notification of the process, allowing you time to prepare. This is often a good time to hire an attorney to help you avoid unpleasant consequences of noncompliance with the state employment laws. An attorney can help you explore your options and give you a better understanding of how the laws apply to your business.

What are the Characteristics of an Employer/Employee Relationship?
The establishing of an employer/employee relationship isn’t determined by one or two concrete details, but by an assembly of factors. These different characteristics are commonly found in most employer/employee relationships and generally are concerned with the ways in which the work is performed. In this type of arrangement, a commonly accepted principle is that the employer provides more direct supervision of the person performing the work.

An employee must adhere to a predetermined work schedule and must perform work in a manner defined by the employer. The employer also designates where and how the work will be performed, usually leaving the employee with detailed instructions on the performance of his or her duties. This usually requires that the employee perform those duties on the site or at a location designated by the employee.

Additionally, it will be up to the employer to set the pay or salary range for each position and often demands exclusivity of service from the employee. This means that the employee may not perform those duties for other employers or businesses, while also demanding that the employee personally completes those tasks. As an employee, an individual may not enlist a third party to perform tasks he has been assigned.

How to Identify a Freelancer or Independent Contractor
In the simplest terms, an independent contractor has more freedom in the performance of his duties. He’s generally left unsupervised to perform the work when and how he chooses, which indicates he may or may not have to perform the work at the employer’s place of business. The Department of Labor recognizes a few other factors that can be used to distinguish an independent contractor from a direct hire employee.

For instance, an independent contractor or freelancer generally operates a business of their own. The business usually focuses on a specific skill set, which the freelancer is experienced in providing to multiple clients. This means the independent contractor will also have their own tax identification number and will be able to provide services to the general public. Clients may consist of individuals or other businesses.

As a freelancer or independent contractor, this type of professional is responsible for his own marketing campaigns. This may mean he has his own business cards, pays for online or print advertising, or uses social media to generate new leads. He may also work out of his own home or occupy a separate place of business, where he invests in machines, furniture, and equipment to help him perform his job.

Another good way to identify an independent contractor is by the expenses he pays out to continue performing his duties. This may include paying taxes and insurance premiums, but also involves other expenses associated with operating his business. As the owner of the business, the individual also takes sole responsibility for any profits or losses he incurs. This is why the freelancer usually sets his own fee, which the client must pay, if he wants that freelancer’s services.

There is more freedom for an independent contractor, as well. He may delegate assignments to employees of his own, or he may perform the work himself. Additionally, he has the choice of when and where to perform the work, though this can depend on the nature of the work. An independent contractor also has the right to reject clients or refuse specific work offers.

While these conditions can go a long way toward helping you understand the differences between a direct employee and a contractor, consulting an attorney may be your best option. An audit can change the way you conduct your business and may subject you to legal penalties, if you don’t make necessary changes. An experienced lawyer will know what changes you will need to make to help you obtain a more favorable outcome from a Department of Labor audit. In the end, hiring a lawyer is an investment in your business that can save you money down the road.

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