When is Someone a Contractor or an Employee

What’s the Issue?

Employees and contractors are treated very differently under federal and state law. Contractors are considered independent business people. They pay their own employment taxes and the employer usually has fewer legal obligations for the worker, such as providing paid time off. Employees, on the other hand, come with greater costs, like employment taxes and benefits.

Sometimes, in the face of these additional costs, child care business owners will opt to have a person be treated as a contractor, even though they should be an employee. Sometimes, this is even the preference of the worker as well.

The problem is that the classification isn’t solely up to the employer. There are rules that determine if a person needs to be one or the other.

Further, misclassification of a contractor can cost you a great deal of money and time. If you make a mistake, even an “honest one” where you just feel you didn’t know, you can be liable for:

100 percent of the employer taxes you should’ve been contributing all along.
A portion of the employee’s contribution to payroll taxes. (Yes, you read that right: the employer has to pay a portion of the taxes they would never have paid in the first place.)
Subject to criminal fines for thousands of dollars.
The price of any missed benefits and other compensation such as paid time off that the worker didn’t get as a contractor.

With risks like these you can see why it is important to ensure you chose the right path - which leads to the question: how do you know which to choose?

The Three Essential Elements

In determining if you have a contractor or employee you want to look at the three essential elements of the definition of employment: service, wages, and direction and control.

Service (Type of Relationship)– Does the person work on a contractual basis or on short-duration projects (like a contractor)? Does the person work for other businesses or just for you?
Wages (Financial)— How is the person paid? For example, is the person paid every week for a set number of hours (which indicates an employee), or does the work vary (like a contractor)? Do they have regular expenses that are reimbursed (like an employee)?
Direction (Behavioral) — How much control do you have over the day-to-day work? For example, do you set the requirements around the hours of work, what equipment or tools need to be used, or the training needed? (If yes, then this person is likely an employee.)

In most states that’s about all the guidance you get.

Luckily in Texas, we have even more detail from the Texas Workforce Commission to help us decide. Here’s how you can use the 20-point comparative approach. First, run through each of the questions for each worker you have. If most of the answers are in the “employee” column, you have an employee. If not, you may have a contractor – it is important to know that it isn’t 100% fool-proof so when in doubt, ask a human resources professional (you can connect with one at texas@ecebizcoach.org).

For more information also check out this guidance from the state of Texas - https://www.twc.texas.gov/businesses/classifying-employees-independent-contractors.

Common Law Factors	Employee	Contractor
1. Instructions	Receives instructions on when, where and how work should be performed	Does the job their way with little to no instruction
2. Training	Trained by a more experienced employee or are required to attend meetings or take training courses	Uses their own methods and thus need not receive training from the employer
3. Integration	Services of an Employee are usually merged into the Employer's overall operation; the Employer's success depends on those Employee services	Services are usually separate from the client's business and are not integrated or merged into it
4. Services Rendered Personally	Their services must be rendered personally; Employees do not hire their own substitutes or delegate work to them	Able to assign another to do the job in their place and need not perform services personally
5. Hiring, Supervising & Paying Helper	An Employee may act as a foreman for the employer but, if so, helpers are paid with the employer's funds	Selects, hires, pays and supervises any helpers used and are responsible for the results of the helpers' labor
6. Continuing Relationship	Often continues to work for the same employer month after month or year after year	Usually hired to do one job of limited or indefinite duration and has no expectation of continuing work
7. Set Hours of Work	May work "on call" or during hours and days as set by the employer	Is the master of their own time and works the days and hours they choose
8. Full Time Required	Devotes full-time service to the employer, or the employer may have a priority on the Employee's time	Cannot be required to devote fulltime service to one Employer exclusively
9. Location Where Services Performed	Employer has the right to mandate where services are performed	Work where they choose. The workplace may be away from the client's premises
10. Order or Sequence Set	Performs services in the order or sequence set by the employer. This shows control by the employer	Concerned only with the finished product and sets his or her own order or sequence of work
11. Oral or Written Reports	May be required to submit regular oral or written reports about the work in progress	Usually not required to submit regular oral or written reports about the work in progress
12. Payment by the Hour, Week or Month	Typically paid by the employer in regular amounts at stated intervals, such as by the hour or week	Normally paid by the job, either a negotiated flat rate or upon submission of a bid
13. Payment of Business & Travel Expense	Business and travel expenses are either paid directly or reimbursed by the employer	Normally pay all of their own business and travel expenses without reimbursement
14. Furnishing Tools & Equipment	Furnished all necessary tools, materials, and equipment by their employer	Ordinarily provides all of the tools and equipment necessary to complete the job
15. Significant Investment	Has little or no investment in the business. Instead, an Employee is economically dependent on the employer	Has a substantial financial investment in their independent business
16. Realize Profit or Loss	Does not ordinarily realize a profit or loss in the business, they are paid for services rendered.	Can either realize a profit or suffer a loss depending on the management of expenses and revenues
17. Working for More than One Company at a Time	Ordinarily works for one employer at a time and may be prohibited from joining a competitor	Often works for more than one client or company at the same time and is not subject to a non-competition rule
18. Making Service Available to the Public	Does not make his or her services available to the public except through the employer's company	May advertise, carry business cards, hang out a shingle, or hold a separate business license
19. Right to Discharge without Liability	Can be discharged at any time without liability on the employer's part	If the work meets the contract terms, an Independent Contractor cannot be fired without liability for breach of contract
20. Right to Quit without Liability	May quit work at any time without liability on the Employee's part	Legally responsible for job completion and, on quitting, becomes liable for breach of contract

So, What Do You Do?

We recommend child care owners take three actions when it comes to classifying workers as contractors:

First and foremost, think through a position before you hire. Run through the 20-point list before you make the mistake of mis-hiring and have the liabilities associated with it.

Second, if you think you may have one or more misclassified contractors, stop and do a full assessment by answering the questions on the above 20-point comparison grid. Again, this means looking at the roles you have and the contractors themselves. Seek help from a Human Resources or Legal professional on what to do on anyone who is misclassified.

Third, when in doubt seek counsel from a Human Resources or Legal professional. As you now know from the possible penalties, potential misclassification is a high-stakes bet and one you don’t want to lose. This is one of those times that it’s worth the money to invest in professional advice if you have questions or want to be sure how to proceed.

Help is Available

If you still have questions about the classification of your staff, you can book a consultation with a business coach to discuss. To book a one-on-one coaching session, follow this link - https://www.surveymonkey.com/r/TXChildCareCoaching.

Disclaimer

The information contained here has been prepared by Civitas Strategies and is not intended to constitute legal, tax, or financial advice. The Civitas Strategies team has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this information are not intended to create, and receipt does not constitute, an attorney-client or any other advisory relationship. Reproduction of this information is expressly prohibited. Only noncommercial uses of this work are permitted.

When is Someone a Contractor or an Employee

When is Someone a Contractor or an Employee?

Learn how to classify your staff

What’s the Issue?

The Three Essential Elements