Are you an employer? No? Are you sure?

Many small and growing businesses try to avoid expenses by creating independent contractor agreements with those they hire to assist them in the operation of their business. The anticipated benefits to a business owner seem to be quite obvious at first glance. If a business does not have employees, it does not have to pay social security, medicare, and unemployment taxes. Not to mention the dreaded and enormous worker's compensation insurance premiums crippling many small businesses.

At first glance the savings seem to be worth it but, business owners must beware. Falsely classifying an employee as an independent contractor can have serious legal ramifications. For example, mis-classifying an employee as an independent contractor can result in complaints to the state labor commissioner. Those complaints can be costly. The labor commissioner does not have a sense of humor! There is no leeway for accidental or good faith mis-classifications. Mis-classifications can result in interest and penalties, back wages and overtime claims by current and former Aemployees.@

So who is an employee? How do you make sure that you are not mis-classifying someone that you have hired to assist you? The short answer: there is no bright line test. The difference between an employee and an independent contractor can be a fine line. If you tell your assistant what to do, how to do it, when to do it, where to do it, and what tools to use to get the job done, your assistant is likely an employee. An employee classification is even more likely if your assistant is paid hourly, receives training on his job duties, and receives benefits such as health insurance, pension and paid leave.

However, if flexibility is the word that would characterize your relationship with your assistant, you may have an independent contractor relationship. If you simply direct your assistant as to the time and place of the task that needs to be accomplished, but leave it up to your assistant to determine how to get the job done, your assistant may be an independent contractor. Evidence of this type of relationship may be bolstered if your assistant incurs substantial un-reimbursed business expenses, makes a significant investment in their ability to perform their work, has an ability to make either a profit or a loss by participating in the business, can get paid by the project, job, or by the hour, uses their own methods to complete the job, and has the ability to take advantage of other business opportunities as they present themselves. The bottom line - employees and independent contractors have different rights and different obligations for business owners. Knowing your obligations as a business owner is one of the most important ways to protect the investment you have in your business.

If you are still unsure about your relationship with your assistant, the IRS is willing to help. A business owner can fill out Form SS-8 describing the relationship they have with their hired help and submit it to the IRS. The IRS will review the form and provide you, the business owner, with their opinion regarding the status of your assistant. Your lawyer can also help you define your relationship with your independent contractors, in writing, with a well-defined and well-drafted contract.