Hiring folks on an ad hoc basis might seem convenient, especially because it is less costly as there are no payroll systems, additional taxes like social security, medicare, workers comp, and disability insurances. It's a bit of a headache, especially in the costly realm of New York State.
We've had so many clients come our way because they've had a little visit from the New York State Department of Labor for an audit. How do they sniff these things out? Well, one common way is if you've hired contractors who also have a full-time W-2 job. If they happen to get laid off and file for unemployment, they've got to list all their income sources. That's often how the state discovers employers who might not have everything perfectly squared away in terms of who's a contractor and who's an employee on the books.
In New York State, just like anywhere else, there's a laundry list of things we have to tick off to prove someone's a contractor, not an employee. Here's the kicker: if the work they're doing directly contributes to your revenue, the state defaults to classifying them as an employee.
Even the US Department of Labor is looking at the employer classification more closely with recently finalized new regulations revising the analysis for determining whether a worker qualifies as an employee or an independent contractor. No single factor dictates the outcome under the economic realities test. Classification is based on the totality of the circumstances. Key factors examined under this test include:
- The permanence of the work relationship. Indefinite, continuous, exclusive relationships suggest employee status.
- Importance of the work to the potential employer's business. Work critical to core business suggests employee status.
- Degree of control exercised by the potential employer over the worker and work. More control by the potential employer favors employee status; more control by the worker favors independent contractor status.
- Opportunity for profit or loss based on the worker's managerial skill, initiative, and business acumen. This suggests independent contractor status.
- Investments by the worker and the potential employer. Capital or entrepreneurial investments by the worker indicate contractor status.
- Worker's skill and initiative, especially in applying specialized skills to business-focused initiatives. This indicates contractor status.
Here's the thing I often tell my clients: steer clear of hiring people as contractors unless they're running their own show. That means if they have their own LLC, you pay the LLC—not the individual. Hiring contractors who are individuals might end up causing trouble, especially here in New York.