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Legal Issues in Parking Area Sweeping |
Independent Contractor or Employee?You can't afford to guessby Grant Gormley
In addition to this letter, we received several phone calls from other contractors around the country concerned about competitors who were operating their businesses with independent contractor labor. Wouldn't it be great if we could get someone to do the work without actually having to employ them? Independent contractors, also called subcontractors, do exactly that. On the surface, hiring a sub sounds like a good idea. However, a closer examination of the issues that define contractor status can bring some sobering revelations. All sweeping businesses that want to grow to be larger than a sole operator face the challenge of having employees. Growth can be a tough decision; in order to get larger, we need employees, but none of us wants the baggage they bring. Hiring, scheduling, benefits, filing and paying taxes, and all those other employee problems can distract the business owner from what really matters most making a profit. Also, the cost of having employees is significantly higher than their wage rate due to taxes, training, health insurance and other benefits. Even with the added costs, in today's tight national job market good employees are harder than ever to find. Many small businesses, and especially sole proprietors, like using subcontractors to avoid the associated federal and state payroll taxes as well as the hassle factor of dealing with state worker compensation agencies. Unfortunately, you cannot just make anyone a subcontractor without running the risk of having more tax problems than if you simply put them on the payroll. The IRS has specific guidelines with regard to who is and isn't a sub. If those guidelines are not met, you run the risk of being responsible for the payroll taxes you should have collected. They also have the power to levy fines designed to encourage your future compliance. The Internal Revenue Service is the federal agency that controls the collection of federal income and social security taxes. An employer must withhold income tax and social security tax from the employee payroll. The employer also matches the social security tax paid by the employee and deposits the total tax at a bank or transfers the funds electronically. In contrast, subcontractors are responsible for filing their own taxes and are paid a lump sum by the employer. Here's how you determine whether your sub really qualifies as such, or is actually your employee whether you like it or not. Federal guidelines for who qualifies as an independent contractor are spelled out in IRS Publication 15-A, the Employers Supplemental Tax Guide. The guidelines are based on the behavioral, financial, and business relationship between the employer and independent contractor. If the behavior of the employer includes training, deciding when and where the work will be performed, providing equipment or supplies, making personnel decisions and, in general, controlling the performance of a worker, then the worker is probably an employee. To qualify as an independent contractor, the employer must not control the financial aspects of the person's business. If the worker is paid by the hour, week or month, instead of by the job, then an employee relationship could exist. An independent contractor must also assume the risks of doing business. If an independent contractor does not act like a business by seeking work, keeping books and taking deductions, for example, then the worker will probably be classified as an employee. The business relationship between an employer and an independent contractor is usually of a finite nature. For example, a contract might spell out the definition, performance criteria and/or price for a certain project. A more permanent arrangement than that may create an employee relationship. The guidelines summarized above from Publication 15-A are subject to interpretation on a case-by-case basis. If you're not sure, the IRS suggests you seek a determination by filing their Form SS-8. Besides the federal determination, the state in which you do business will have similar independent contractor guidelines for unemployment and worker compensation funds, as well as for state income tax, if levied in your state. Of potentially greater concern for an employer wishing to use independent contractors to perform work is the issue of workers' compensation claims and general liability. A regular employee who is injured on the job generally has the sole recourse of worker compensation funds for injury claims. If an individual acting as an independent contractor is injured while operating employer-owned equipment, he may sue the employer without limit. If there is doubt with regard to the status of your independent contractor being an employee, it may further complicate the situation since some measure of negligence on the employer's part may be shown. In such circumstances, the sole recourse of the employee to worker's compensation is not present. Injury cases of this type are often won, and a company's general liability policy may or may not cover this type of claim. Without coverage, employers may be left to battle a contingency-oriented personal injury lawyer without the help of their insurance carrier. Not a pleasant thought. This can sink a small business just from the 'distraction factor,' not to mention the possibility of a large award by the court. If you do employ independent contractors to run your sweepers, check with your insurance agent to confirm that your coverage remains valid. Another twist on general liability concerns is the question of responsibility when your sub has an accident involving either customer property or the general public. The legal jargon for employer responsibility is that of vicarious liability, which might be paraphrased as "The big guy pays." This part of the liability issue may have the potential for impacting property managers and other customers, too. If there is an accident involving a sweeper operator, one who is being called an independent contractor but who is really an employee, coverage initially supplied by the sweeping contractor of record may apply. And, if the so-called independent contractor has no liability insurance, it's unlikely that the injured parties will just choose to 'forget it.' Rather, a lawsuit will probably be filed against the owner of the business property where the accident took place. Independent contractors should have general liability insurance that makes the employer a loss payee. The company hiring the subcontractor must make sure the sub has the amount and type of coverage to fit the correct profile. In addition, the sweeping company's underwriter needs to be made aware of all possible scenarios regarding the operation of sweeping equipment. This is a situation in which some time spent with a qualified business lines insurance agent might save a business from disaster. Also, when property managers hire a sweeping company it's with the expectation that whoever is sweeping for them will be an employee of the company they hired. When a sweeping contractor subcontracts the account out to a third party, property owners are put into the precarious position of having someone on their property at night and without supervision they've not actually met or agreed to do business with. It's also a person who, by the IRS' legal definition, may not be under the supervision and control of the company they think they've hired to do the sweeping job. Job shops and temporary agencies can provide labor without the hassles of either employees or independent contractors. When employing a temp or job shopper, technically the employee works for the agency but takes direction from the employer. The agency takes care of payroll, workers' compensation and other employee concerns. The employer pays all of the costs of the employee plus a percentage to the agency. Temporary agencies, which are located in most cities, will often cater to an employer's needs by always sending the same person, or other special requests. Often, the agency will 'sell' the employee to the employer on a permanent basis if they work out well or when the employer is ready to commit to having an employee. If you do use independent contractors, or are designating that your sweeper operators are subs, ask yourself and your insurance agent, accountant and/or attorney if you have covered your bases. Although it might seem attractive to avoid employer responsibilities by using independent contractors, the typical sweeping operation would not appear to pass the critical tests. It might be convenient for you and your Cousin Fred to work out a little cash deal to drive that late night sweeper shift, but I can guarantee it won't be worth the savings when a mishap occurs, or if the IRS decides a few months or years down the line that you should have been paying taxes on him. Grant Gormley has been an engine dealer and machine shop owner and now concentrates on business consulting and technical writing. Contact him at 360-961-0432 or email him at gmachinc@telcomplus.net. |
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