Are Long-Term Contractors Risky?

In a word, potentially. Proper use and management of independent contractors is a big issue for small businesses. Simply because you and your company consider these workers independent contractors doesn't mean the government will. If they're later deemed to be misclassified employees, your company

could be liable for unpaid employment taxes and insurance (and other penalties). You could also be liable to the workers themselves for the value of any benefits provided to your full-time employees but not to them.

Below are a number of factors the IRS uses to determine whether an employer has correctly classified its workers:

• Employer control. If a worker must follow an employer's instructions regarding when, where, and how to perform the work, this suggests an employer-employee relationship. This is the biggest single factor in the determination.
  
• Hours of work. Set hours of work suggests the individual is an employee.
  
• Full-time. Working full-time or substantially full-time for one employer suggests an employer-employee relationship.
  
• Employer's premises. Work performed substantially or exclusively on company premises suggests the individual is an employee.
• Payment by the hour, week, or month. Payment on a regular schedule suggests the worker is an employee. Independent contractors are usually (but not always) paid by the job.
  
• Training. Any direct training provided by the employer suggests the individual is an employee.
  
• Assistants. If the worker hires and supervises his or her own assistants, this suggests that person is running an independent business and is not an employee.
  
• Profit or loss. If the worker has no real exposure to profit or loss beyond that of an ordinary employee, this also suggests an employment relationship.

These are not rigid rules, but factual considerations that cumulatively determine whether a worker is an employee or an independent contractor. Another hidden issue is that if your contractors are really employees, they're entitled to all the same antidiscrimination protections as your regular workers. That's because these civil rights laws are all premised on an employer-employee relationship.