A lot of people try to get around labor laws with the ‘sub contractor’ situation. And for a pay by the job basis, you MIGHT get away with it. But the very first time you require them to show up at a specific time and do not allow them to leave without threat of losing money, they become employees.
Many a mechanic shop has learned this the hard way. They get away with it for a time, until someone rats them out.
When the State Worker's Compensation Division agrees that it is a contractor/subcontractor relationship and not employer/employee, then I guess there should not be a problem.
BTW, his company bills my company, my company pays him. All perfectly legal.
The state department of revenue here in Illinois cracked down on “contractors” years ago, starting with those people you see in grocery stores handing out food samples, they are no longer “contractors” but employees.
Then they went after car dealers that paid their sales people on a commission only basis where they found that many weren’t even making minimum wage, especially in the slow season.
Other states will follow suit if they haven’t done so already, after all, isn’t every state looking for new revenue?
The people who work with me have their own company, usually a one-person LLC. They contract out their services and perform as a subcontractor. It opens up opportunities to shield income from taxation not present to the average employee,(1) and lets them write off more of their operational expenses than they'd be able to write off on a form 2106.
A lot of people try to get around labor laws with the ‘sub contractor’ situation. And for a pay by the job basis, you MIGHT get away with it. But the very first time you require them to show up at a specific time and do not allow them to leave without threat of losing money, they become employees.(2)
An employer has to be very careful in determining who is an employee vs. who is qualified to be treated as an independent contractor. There can be huge penalties levied by the IRS against employers who misclassify employees as independent contractors especially if it is done in order to evade employment taxes. Not to mention potential issues and penalties with the DOL for violations of FLSA when it comes to overtime if it is determined the worker is actually a non-exempt employee.
An independent contractor arrangement works in some industries, say for just an example, a person who is a plumber or drywall installer who subs out their work to general contractors. But in that type of arrangement the subcontractor provides all their own tools and supplies, their own insurance including liability insurance, pays for any of their own licensures, sets their own work hours, can choose to not work, leave a job site early or start work early or work late as long as the job is completed within a predetermined timeframe as determined by the contract.
True independent contractors often have a contract per job or under a set time period – a yearly or monthly contract for services for example and there is a set price per job although they can charge by the hour. Independent contractors also work under limited direct supervision. If the employer closely supervises and directs the persons work, most likely they are not an independent contractor. They are also typically not independent contractors if they directly supervise the work of the company’s actual employees and or have the authority to assess their performance, have input on their performance reviews and raises or writes them up for disciplinary infractions as that implies an employment relationship. They are also not independent contractors if the employer has to provide training in order for them to perform the work or offers them benefits offered to employees such as paid time off, health insurance or retirement plans. Also when the work is considered integral to the business, it is more likely that the person is an employee and not an independent contractor.
Another test is whether the independent contractor is free to offer the very same services to other companies, even to the employer’s competitors and is free to do all the work themselves or hire or sub out to others to assist them. They can also refuse to take on additional work, i.e. additional jobs when offered without penalty or the threat of being terminated from the job they have already have an agreement/contract to perform. And if an independent contractor’s contract is terminated or not renewed, an independent contractor is not entitled to file for unemployment benefits. Independent contractors are also at risk for operating at a business loss where as an employee is not.
Independent contractors submit invoices for their services but don’t punch a time clock and don’t have set working hours determined by the employer. And the independent contractor gets to set payment terms (net 15 days for example), although the company may negotiate other payment terms (net 60 days or payment only after the entire job is completed). Independent contractors are responsible for paying their own taxes including self employment tax (the equivalent of the employer’s share of SS tax) and they have to file and make quarterly estimated tax payments.
A store cashier or stock clerk would definitely not IMO qualify as an independent contractor under present law.
(1)Note of a slight disagreement: tax avoidance is legal, tax evasion however is not. All income is always reportable; you are never allowed to “shield” income from taxation. But “taxable” income is determined by other factors such as netting gross income against legitimate and allowable deductible business expenses. That which is deductible as unreimbursed “Employee Business Expenses” are essentially the same as what are deductible to an independent contractor.
http://turbotax.intuit.com/tax-tools/tax-tips/Jobs-and-Career/Should-I-Use-IRS-Form-2106-or-2106-EZ-for-Non-Reimbursed-Work-Related-Expenses-/INF22397.html
This has a pretty good overview of employee vs. independent contractor:
http://www.legalzoom.com/everyday-law/workplace/employee-vs-independent-contractor-differences
(2)FWIW - back in the early 90’s my husband worked as an estimator/project manager for a cabinetry fabricator/installer. The company was in serious financial trouble, in great part as we learned much later because the owner was a coke head and was snorting all the company’s revenues up his nose. One day the owner came up with the idea to pay my husband as an independent contractor, paying him via an AP check for only his regular net pay (less a deduction for health insurance which he was allegedly still paying for) plus a verbal “promise” of a flat dollar bonus amount to be paid at the end of the year to cover his self employment taxes. When I found out several months later that my husband had agreed to this arrangement, I went ballistic. There was no way that my husband was an independent contractor and the owner of this company was only trying to do this to avoid paying employment taxes, which I later found out he had not been paying for the last year anyway.
To add injury to insult, the owner hadn’t paid health insurance premiums for many months either even as he was still deducting them from people’s pay. I found this out some six months later when the insurance company sent us a retroactive termination letter and I started getting collection letters from doctors for unpaid bills. Long story short, I convinced my husband to find another job and quick and a few months later the guy’s shop burned down under mysterious circumstances, although arson was never conclusively proven. Then a few months later he committed suicide and we were left holding the bag for the unpaid taxes as the business was bankrupt and he left no estate, only debt. What really made me angry was that we were supposedly friends and that the guy not only left my husband and his other employees holding the bag, he also left his wife and two children pretty much destitute.
We had a friend at the time who was a retired IRS agent who was doing tax preparations. He advised us to create a substitute W-2 showing what my husband would have been received in gross pay for the entire year as employee and the amount of SS and Medicare tax that should have been withheld. We were still on the hook for the federal and state withholding taxes that were shorted, not deducted or paid during the months that my husband was being paid only the net pay, but as we never received a 1099 and there was no way we shouldn’t have gotten one anyway, it was our only option. The IRS and the state of MD accepted our substitute form BTW, we paid the taxes owed and were never audited.
Word to the wise: if any employer tries to convert your present position to that of an independent contractor, be very aware of the law and of your potential liabilities. If you are an employer who thinks that simply converting your employees to independent contractors might be a good way to save you some money, also be aware that you cannot arbitrarily reclassify them and the IRS and DOL penalties can be huge and cost you much more than you would have paid in employment taxes or overtime.
State unemployment insurance people frown on this and the rules are squishy enough so that you will lose under any questionable scenario. We just finished a 4 hours audit and they went over everything with a fine-toothed comb.
If they re-classify any of your subs as employees, you are in a world of trouble because then there is the not only the unemployment insurance, but the Feds are now involved because of back SS and Medicare.
It's a potential nightmare.