Over the past 30 years in working with homecare & hospice clients, the subject of whether to classify workers as employees or independent contractors has come up many occasions.
The first thing you have to consider is how you will justify the classification of these workers to your Workers Compensation auditor, and the I.R.S. The simplest way I can answer this question comes directly from the I.R.S. and the State Compensation Insurance Fund's websites - that is, what level of control do you have over your worker? If you can instruct the worker how to do their job, or where to be and when to be there, you likely have just passed the threshold that your worker is, indeed, an employee.
In addition, independent contractors are required to have their own liability insurance, business license, workers compensation coverage, etc. and should provide you with certificates of insurance prior to working for you. I have provided links to a few websites that offer more detailed information regarding this subject. I would suggest that you consult your attorney prior to classifying your workers as independent contractors so you can avoid any disputed workers compensation audits in the future.
From The State Compensation Insurance Fund Website:
The difference between independent contractors and employees is sometimes difficult to distinguish when it comes to workers’ compensation insurance.
California courts and state agencies typically use a number of tests to determine whether an individual is an employee or an independent contractor. A crucial factor in determining employment status is the employer’s right to direct and control the work being performed. If you have the right to control the manner and means of the work performed, the courts have routinely decided that the “independent contractor” is actually your “employee”.
There are many other considerations, but the answer to any one factor does not necessarily determine status. Among them, whether the person performing the service:
Has the right to terminate the relationship at will.
Is engaged in a distinct occupation or business.
Has voluntarily chosen the burdens and benefits of self-employment.
Has the skill required in the particular occupation.
Supplies the instrumentalities, tools, the work location, and carries the license or certificate required to perform the work.
Has the right to hire and terminate others.
Is paid by the time worked, or by piece rate.
Works under the direction of the employer or by a specialist without supervision.
Other factors include:
Whether the services are a part of the regular business of the employer and whether the parties believe that they are creating the relationship of employer/employee or employer/independent contractor.
If there are questions, the Labor Code assumes a worker is an employee for workers’ compensation purposes. The burden of proof to support the independent contractor status of a worker falls on the employer. The Labor Code also requires that any subcontractor who does not have an active valid contractor’s license be treated as an employee, not an independent contractor. However, even though a worker may have a valid license, the worker may still be an employee depending on the factors as discussed above.
A good rule of thumb: as an employer, always protect yourself.
If certain jobs require a license, request a copy for your records.
Obtain original Certificates of Workers’ Compensation Insurance addressed to you from all contractors and subcontractors who have employees or who, in turn, subcontract any portion of their work.
If proper documentation is not maintained and presented to our auditors, we are obligated to charge premium for any liability that may exist under your workers’ compensation insurance policy.
The I.R.S. Website contains information regarding the proper way to classify your workers. Please note that these criteria may differ slightly from the criteria of your particular insurance company.
Classification of workers is an extremely important function, regardless if you are a new company, or a large company operating in multiple states.
There have been many discussions with clients who believe the classification decision belongs to the employer. This simply is not true. The criteria used by statute and your insurance carrier will determine if a worker is actually an employee or an independent contractor.
The reason this is so important is that after the expiration date of your policy, you will be contacted by an auditor from the insurance company. The function of the auditor is to confirm that all payroll is properly classified. If you cannot show current certificates of workers compensation insurance for your remuneration classified as "1099", it is likely that amount of remuneration will be transferred into your W2 payroll and a premium charge made for that amount.
It's better to get it right from the beginning rather than be surprised with a large audit after your policy expires.