Although independent contractors must pay federal and state taxes, they do so on their own, typically by making estimated tax payments throughout the year. For the engaging company, the benefits are equally, if not more, significant. The costs of independent contractor engagement pale in comparison with those associated with employee hiring and retention. For instance, the company is not required to contribute to unemployment insurance funds, provide expensive benefits e.
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Independent contractor engagement also generally comes free from the risk of potentially costly employment litigation e. Moreover, engaging independent contractors has the added benefit of allowing employers to increase their workforce without the costs and commitments associated with hiring additional employees — an advantage that is particularly beneficial for companies with seasonal and other fluctuating workload needs.
While the benefits of independent contractor relationships are substantial, the consequences of misclassifying employees as independent contractors can be dire. Unfortunately, determining whether a worker is properly classified as an independent contractor as opposed to an employee is not as simple as it may sound. In recent years, a smattering of disparate and in some respects, inconsistent tests have emerged — among federal and state courts, as well as various regulatory and administrative agencies e.
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Department of Labor and the IRS. The IRS, for example, uses a factor test to evaluate proper independent contractor classification. The tests coming out of the court system are no less varied. For example, federal courts in the Third Circuit examine six factors:.
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One of the more common myths shrouding the independent contractor relationship is that a written agreement that officially labels a worker as an independent contractor, rather than an employee, will shield a company from misclassification liability. That assumption is incorrect.
One principle on which all courts and agencies appear to agree is that it is not the contractual label, but rather the actual relationship between the worker and the engaging entity, that controls. There are many implications to consider. Below we touch on one of them.
While some may advocate for an automatic, across-the-board employee classification of all gig workers who might not qualify for independent contractor status under the applicable ABC test, these decisions can result in unanticipated consequences. In determining employee classifications, one area often overlooked is the duty of loyalty—a hallmark of the traditional employment relationship.
If interpreted more broadly by the courts, the ABC test could apply to employment generally, including the classification of all workers. At the very least, it would be a risky proposition for any employer to assume that the ABC test would not be applicable to his or her circumstances. Ultimately, no matter how familiar one may be with this content, it is strongly recommended that prospective employers seek the advice of a qualified legal professional regarding the classification of any worker as an independent contractor. While there is ordinarily a cost associated with obtaining such advice, it may prove to be a good investment if it helps to avoid a much more costly mistake.
This will obviously be difficult to accomplish if the psychotherapy practice, and the independent contractor, are providing the same psychotherapy services. In spite of such limitations, it does not mean that it is impossible for a therapy business to hire someone as an independent contractor. Therapists who are faced with similar situations should consult with a labor law attorney.
Michael is available to answer member calls regarding legal, ethical, and licensure issues.