Robert W Ditmer Financial Support

Part-Time or Temporary Worker
Employee or Independent Contractor?

 

Scenario 1: Bridal Jewelers needs a bookkeeper for 3 hours every other Tuesday to bring its books up to date and to process its payroll. The work must be performed at the store using the business's computer and software, and the work to be performed is very specific. The rate is $25 per hour. Is the individual an employee or an independent contractor?

 

Scenario 2: Jiffy Used Cars hasn't had its bank statements reconciled for a year. Not all checks have been recorded in the checkbook or in the company's bookkeeping software, so the individual hired to perform the work has to put all canceled checks in order, enter the missing checks in the bookkeeping software, and reconcile the bank statements using the company's bookkeeping software. The work needs to be performed one time and will require 2 or 3 days of work. The rate is $25 per hour. Is the individual an employee or an independent contractor?

 

Scenario 3: Majestic Engineering has just decided to institute a new policy for handling expense reimbursements to employees. The company wants to hire a technical writer to prepare a administrative procedures manual for the finance department to institute the new policy, as well as to prepare the new section of the Employee Handbook. The writer has to meet with the company's representatives in order to gain an understanding of the new policy, and he will be paid a flat fee for the two items. Is the individual an employee or an independent contractor?

 

The inclination of some employers is to hire and pay all of these individuals as independent contractors. The part-time worker (Scenario 1) is only earning $75 every two weeks. The temporary worker (Scenario 2) will earn a one-time amount between $400 and $600. Neither one could possibly qualify for benefits, so why go through all the effort of hiring either one as an employee?

 

Publication 15-A, Employer's Supplemental Tax Guide, provides detailed definitions of independent contractors. The information in that publication clearly shows that the primary difference between an employee and an independent contractor is the matter of control. Nowhere in the definitions does it indicate that the amount of time spent by a worker, or the length of time required to complete the work, is considered in determining whether or not an individual is an employee or an independent contractor.

 

For instance, in Scenario 3 the individual is definitely an independent contractor. Majestic Engineering has no control over how, when or where the contractor performs the work. There is also the possibility of either a profit or a loss, especially if the work takes too long to complete. The individual will provide his own materials and transportation to and from Majestic's offices. But what about Scenarios 1 and 2?

 

In Scenario 1 Bridal Jewelers controls where the work is performed, when it must be done, what work is performed and how it is to be done. So the individual is an employee, not an independent contractor. Every two weeks he receives a net paycheck of $69.26 ($75 wages minus $5.74 in FICA taxes.) In fact, one of his tasks is to pay himself for the previous time he worked.

 

In Scenario 2 Jiffy Used Cars still has control over what work is to be performed, how it should be done, where it should be done, and when it should be done, even though the work is only temporary. Although the individual may only be working for 2 or 3 days, the employer must still go through the process of hiring the employee, having the employee complete all necessary paperwork, withholding taxes from the employee's pay, and reporting all wages and withheld taxes on Form W-2.

 

Could Jiffy Used Cars have avoided paying someone as an employee to perform the work? Yes. They could have hired someone through a temporary agency, or they could have hired a freelance bookkeeper and relinquished much of the control.

 

One of the factors mentioned above in determining whether or not a worker is an independent contractor is whether or not the individual has the potential for profit or loss. A freelance bookkeeper, assuming that the work would take up to 3 days, could quote a fixed fee of $600, based on his projected rate of $25 per hour. He could arrange to collate all of the bank statements, reorder all of the canceled checks, and locate all of the missing checks working from his home office. The only task he would perform in the company's office would be to complete the reconciliations using the company's bookkeeping software. If the work took more than 3 days to complete, the bookkeeper would lose money on the project.

So the amount of time spent on a job is irrelevant. Even part-time and temporary workers must be paid as employees if the employer has behavioral and economic control over how the work is performed. Making the correct distinction is critical because there could be legal consequences for misclassifying workers. The next article in this series will address those issues.