Whether your business is applying for a Paycheck Protection Program loan, navigating sick leave requirements, managing your cash flow day by day, or – most likely – doing all these things at once, you must be clear regarding which workers are employees and which are independent contractors. While the distinction between the two is always important, the COVID-19 pandemic has added another layer to the issue. Here’s a brief review of the differences, and please call us at (631) 738-6781 to review your particular situation.
A Federal and State Issue: The determination of whether a worker is an employee or independent contractor is both a federal and state issue. The U.S Department of Labor (DOL) views misclassification as denying access to critical benefits and protections to employees to which they are entitled by law. Employee misclassification also reduces taxes paid to federal and state governments, and lowers contributions to state unemployment insurance and workers’ compensation funds.
Federal Guidance: In general, an independent contractor is an individual engaged in a business of his or her own, while an employee is dependent on the business he or she serves. The DOL’s Wage and Hour Division applies a six-factor balancing test, based on Supreme Court precedent, to determine a worker’s classification. These include: (1) the nature and degree of the potential employer’s control; (2) the permanency of the worker’s relationship with the potential employer; (3) the amount of the worker’s investment in facilities, equipment, or helpers; (4) the amount of skill, initiative, judgment, or foresight required for the worker’s services; (5) the worker’s opportunities for profit or loss; and (6) the extent of integration of the worker’s services into the potential employer’s business.
New York State Guidance: According to the New York State Department of Labor, independent contractors must be free from supervision, direction, and control in the performance of their duties. Furthermore, New York State is more stringent in determining whether an employer-employee relationship exists. An employer-employee relationship may exist (rather than an independent contractor relationship) if the employer: (1) chooses when, where, and how workers perform services; (2) provides facilities, equipment, tools, and supplies; (3) directly supervises the services; (4) sets the hours of work; (5) requires exclusive services; (6) sets the rate of pay; (7) requires attendance at meetings and/or training sessions; (8) asks for oral or written reports; (9) reserves the right to review and approve the work product; (10) evaluates job performance; (11) requires prior permission for absences; and (12) has the right to hire and fire.
If a business is discovered to have improperly treated an employee as an independent contractor, the business will be held accountable for employment taxes for that worker, as well as unemployment insurance and workers’ compensation contributions, with associated fines and penalties. As the business community navigates the economic fallout of the coronavirus crisis, these distinctions continue to matter as they may impact PPP loan entitlement, unemployment and sick leave eligibility, health insurance coverage, and more.
CMM is here for you as we weather this storm. Please don’t hesitate to call on us for guidance on this or any other issue on your mind.