Whether an individual providing services to a company is properly classified as an employee or independent contractor depends on many factors. When the situation is evaluated, courts and agencies often consider all aspects of how the individual is treated. To support an argument that a service provider is properly classified as an independent contractor, that individual needs to be treated as an independent business professional, not an employee.
Vendors and other businesses with which the company deals are paid through accounts payable. Of course, employees are paid through payroll. Vendor bills are generally paid on days that differ from the company’s payroll. Any actions that distinguish service providers from employees can support the company’s argument that the provider is a contractor—including not running contractor’s pay through payroll and not paying it on payroll dates.
Whether contractors can be paid by the hour depends on the situation. Sometimes vendors (including accountants, lawyers, and even sometimes plumbers and mechanics) charge their services by the hour. If that is the only factor that could tie the service provider to an employee status, it likely would not be enough.
There are many federal and state laws that apply to employees but not to independent contractors, such as minimum wage and overtime compensation, requirements to withhold payroll taxes, and requirements to provide unemployment insurance and workers’ compensation. As a result, employers who are found to have misclassified service providers as independent contractors can face significant costs, including back wages, back taxes and legal fees, as well as fines and penalties. Therefore, employers should be mindful actions that could undermine their arguments that the individuals are bona fide contractors. Paying contractors through accounts payable on other than employee payroll days can help support a contractor classification.
Employers should consult with counsel regarding the guidelines and laws for classifying service providers as employees or independent contractors.