Although there are many factors in determining whether a person is an employee or an independent contractor, the key element is the amount of control a company has over the worker.
In general, the company controls the outcomes whereas the independent contractor controls the manner and means by which the outcomes are achieved. if the company controls both the outcomes as well as the means for achieving the outcomes, the worker is an employee. The more control a company exercises over how, where, and when the work is performed, the more likely the worker is an employee.
Companies do not have to withhold taxes from independent contractors' compensation. Further, employment laws (such as overtime pay requirements) do not apply to independent contractors. These facts may tempt companies to classify workers as independent contractors.
However, if a company misclassifies a worker as an independent contractor when the company possessed the requisite amount of control, the legal ramifications for the misclassificaiton can be substantial. The company would be liable for paying the taxes that should have been withheld, back overtime compensation, and anything else the company would have had to pay if the worker were correctly classified as an employee. The company would also have penalties and interest tacked on to these late payments.
If you are unsure about whether your workers should be classified as independent contractors or employees, please contact us and speak to one of our professionals.