by Dave Mount, Westaff
Independent contractors (again)
The Vermont Department of Labor has been running ads about independent contractors, so I thought it would be a good time to revisit this subject. The department’s ads are quite good, but they can tell only a little of the story in the 30 seconds that the ad runs.
In my work with small businesses, I find that this is one of the biggest problems companies face. The question is: At what point do I begin an employment relationship with a “contractor”?
I would like to start off by giving you a sense of why the State has made this a priority.
Vermont loses a great deal of money when an employee is misclassified. No unemployment tax is paid on contractors. That is generally around 5 percent of eligible wages. Contractors also generally do not have workers’ compensation insurance, and that can be costly to the state in the event of an accident. Often, the Medicaid system has to take over to cover the medical costs.
The federal government also has a horse in this race. The government loses a minimum of 2 percent of wages paid, which is the difference between self-employment tax and the amount normally paid by employers for Social Security and Medicare taxes.
So governments have a lot at stake in this issue, and they want companies to get it right. Yet many companies in a number of professions run into this issue. I am thinking about personal service employees such as barbers, hairdressers, yoga instructors, and massage therapists, for example. But it can be found everywhere. Realtors are a special case, and agents are specifically exempted in the law.
The Department of Labor can retroactively charge a company for unemployment insurance for employees they deem misclassified. That can hurt.
An employee is someone you direct in everyday work activities. If you tell a person when to work, where to work, how to work, that’s probably an employee. Even people in remote locations are employees if you control some or all of their work. I talk with a lot of people who work from their homes, but they are employees because of the control factor.
Many people are questioned on this when a “contractor’s” assignment ends and they claim unemployment. The Department of Labor will have no record of this person whom you consider a contractor. This will trigger an audit and probably a retroactive assessment of state unemployment insurance, if not outright penalties.
Here are some concrete things you can do to prevent future problems:
• Report all workers to the Department of Labor for Unemployment Insurance. If this is your first employee, call the department, which will set you up with an account.
• Be sure you are reporting everyone for workers’ compensation insurance purposes. If you need workers’ comp, call your insurance broker. The insurance is costly at the beginning because most insurers want a deposit equal to the first year’s estimated premium (although this may be negotiable).
• Be sure that all workers have the appropriate taxes withheld and are reported on Form 941 and the state income tax form.
These items drive up your cost of employment. You will be paying state unemployment insurance and the federal taxes, which will cost you about 12 percent of salary. Workers’ compensation is another cost to you and it is experience- and job-rated, so I cannot give a rule-of-thumb cost but it will be a percentage of salary.
If the state is successful in drastically reducing the number of people working as “contractors,” every Vermont company will benefit because everyone will have the same basic costs and one company will not have a 12 percent advantage on employment costs.
Also, we can put an end to paying people “under the table.”