We have analyzed employer-employee relationships from various angles, and agonized over the ways employers need to be compliant when establishing an employment relationship on a permanent or temporary basis. We have discussed the issue of misclassifying workers as independent contractors in these columns, often resulting in fines for violation of tax laws and compensation for lost benefits. Recently, there has been a surge in questionable but apparently quite legal practices in which candidates are offered ‘permanent’ positions, but told that for a probationary period they will be considered independent contractors, ineligible for compensable overtime, health benefits, holiday and vacation pay, workers’ comp and unemployment insurance, and other benefits automatically available to permanent employees.
Witness the recent back wages levied upon a Georgia-based company by the Department of Labor for treating its workers as independent contractors during their 90-day probation and denying them overtime under the FLSA and other protections. Through this method, the employer saves on the costs of matching employment taxes and other administrative costs in case the worker proves unsatisfactory and does not survive beyond the probationary period. Is this practice legal? It depends. A deeper understanding of 1099 classification compliance is needed to determine if an employer would be transgressing legal boundaries.
By its very definition, an employer’s relationship with an independent contractor is of a contractual nature and hence, does not allow for the employer to exercise any control over where, when and how the work is performed other than the definition and timing of the expected deliverable. While employers can indicate to an independent contractor that a potential permanent position may be available in the future, they cannot directly tie consideration for that position to performance as an independent contractor.
Workers whose relationship with the employer is not really independent, either due to a behavioral control or financial control exercised over them by the employer cannot be deemed to be independent contractors. If the probationary period is devoted to breaking in the new employee and teaching them the ropes, requiring the independent contractor to work onsite, maintain specified hours, and have all tasks directly supervised by a company employee, then the IRS will find the company to be non-compliant with 1099 classification regulations. If, however, an individual establishes an independent contractor relationship, that individual may be considered for a permanent position.
There are many legal ways in which an employer can secure temporary services, and then take a call on letting them go or making them permanent – should they choose to do so! Most contracts with staffing agencies include clauses that allow the company to transition a contract worker to a permanent employee after meeting certain time requirements and/or financial commitments. In addition, many individuals leverage their successful performance as independent contractors to secure a permanent position with a former client.
In today’s world, we all recognize that ‘permanent’ employment is a myth. Unless you have been appointed to the U.S. Supreme Court, you are most likely an “employee at will” in which your employer can terminate your employment at any time. Companies can – quite legally – indicate to a new hire that there is a probationary period in an inability to achieve performance standards will result in termination. However, tying that period to efforts to save costs will most likely result in fines, penalties and legal fees that far exceed what would have appropriately been paid to the worker. For more information on regulations for worker classification, download our whitepaper, “No Worries: Complying with Regulations for Temporary Workers.”
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