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Employees vs. Independent Contractors: The Importance of Accurate Classification

independent contractors.jpgIn recent years, there have been significant changes in the way in which many Americans work and earn money. Non-traditional working arrangements and what many have termed the "gig economy" have blurred the line between traditional employee relationships and independent contractors. Generally speaking, an employer-employee relationship exists when the employer exercises control over how and when the work is performed. Independent contractors, on the other hand, are hired to perform a specific service and are considered self-employed.

When independent contractors perform services on a regular basis for a particular employer, employers run the risk of creating a de facto employer-employee relationship, which can trigger significant legal responsibilities and liabilities. For this reason, it is critical to correctly classify individuals performing services as either independent contractors or employees.

Wage and Hour Requirements

Employees are covered by federal and state wage and hour requirements that address issues such as minimum wage, overtime pay, and mandatory rest breaks. These laws do not apply to independent contractors. If an employee is incorrectly categorized, however, violations of these rules could result in significant legal liability for employers.

Workers' Compensation

Hiring an employee usually triggers a legal requirement for employers to purchase workers' compensation insurance in order to cover costs associated with any work-related injuries or illnesses. If an employee who was misclassified as an independent contractor becomes ill or is injured and successfully claims that he or she should be covered under workers' compensation, the employer could potentially be held liable for the losses that would have been covered by the program.

Vicarious Liability

Another issue of which employers should be aware is that while they usually cannot be held liable for the negligent conduct of their independent contractors, they can be held liable for the negligent conduct of their employees. For this reason, employers should carefully consider the relationship they have with the individuals who perform work for them and the tasks associated with the work performed. For example, while there may be little risk involved with an independent contractor providing marketing materials for a business, there is likely a significant risk associated with an independent contractor regularly performing delivery services in a motor vehicle.

Tax Withholding

Independent contractors are responsible for their own tax liabilities and are expected to pay taxes on the income they receive through self-employment. In the case of employees, however, employers are expected to withhold and pay certain taxes from and on wages paid to employees, including income, Social Security, Medicare, and unemployment taxes.

Contact a San Jose Business Attorney Today to Discuss Your Situation

It is critical for businesses to accurately classify individuals who perform services as independent contractors or employees. Failure to do so can result in significant legal and financial consequences, some of which may even have the potential to put a company out of business. To schedule a consultation with one of the San Jose business lawyers of Diemer, Whitman & Cardosi, LLP, call our office today at 408-971-6270.



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