Employee or Independent Contractor?

Many employers find it easy to bring on new talent and classify them as independent contractors.  The ease of processing payment to independent contractor is so tempting that it’s hard to pass by.   No federal or state taxes to withhold, no payroll processing fees to incur and the contractor is responsible for reporting their income.  Issue Form 1099-MISC by January 31 of the following year and you’re in compliance.

This decision may be appropriate for some situations.  However, often one can argue that the independent contractor working for you is actually an employee.  There is a method developed by the Maine Department of Labor for determining who can be classified as an independent contractor.  Below is actual language from the law as found on Maine.gov:

Services performed by an individual for remuneration are considered to be employment subject to this chapter unless it is shown to the satisfaction of the bureau, that the individual is free from the essential direction and control of the employing unit, both under the individual's contract of service and in fact, the employing unit proves that the individual meets all of the criteria in Number 1 and three (3) of the criteria in Number 2 as listed below.

1. The following criteria must be met:

  1. The individual has the essential right to control the means and progress of the work except as to final results;
  2. The individual is customarily engaged in an independently established trade, occupation, profession or business;
  3. The individual has the opportunity for profit and loss as a result of the services being performed for the other individual or entity;
  4. The individual hires and pays the individual’s assistants, if any, and, to the extent such assistants are employees, supervises the details of the assistants' work; and
  5. The individual makes the individual's services available to some client or customer community even if the individual’s right to do so is voluntarily not exercised or is temporarily restricted; and

2. At least three (3) of the following criteria must be met:

  1. The individual has a substantive investment in the facilities, tools, instruments, materials, and knowledge used by the individual to complete the work;
  2. The individual is not required to work exclusively for the other individual or entity;
  3. The individual is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work;
  4. The parties have a contract that defines the relationship and gives contractual rights in the event the contract is terminated by the other individual or entity prior to completion of the work;
  5. Payment to the individual is based on factors directly related to the work performed and not solely on the amount of time expended by the individual;
  6. The work is outside the usual course of the business for which the service is performed; or
  7. The individual has been determined to be an independent contractor by the federal Internal Revenue Service. *(an SS-8 determination)

Also included in this new law are clear penalties to deter the intentional misclassification of workers as independent contractors when they are employees per the standard. This practice not only creates a competitive disadvantage for those employers who correctly classify their workers but also increases unemployment tax premiums because fewer employers are paying appropriate taxes. Therefore, penalties ranging up to $10,000 were included in the new law to deter this practice.