Make sure you know the employment laws regulating the matter.
Lyn shares what to consider when you are hiring an independent contractor (consultant) vs. an employee.
It is not uncommon for organizations, including many in the nonprofit sector, to enter into consulting contracts with individuals who should legally be hired as employees. This mistake is often made with good intentions.
Augmenting the Workforce: The Options
When nonprofits want to augment their regular workforce or fill a vacant position, hiring consultants instead of adding employees to the payroll seems like a win/win situation for everyone. The organizations can afford to pay consultants more than regular employees because there are no payroll taxes or benefits to fund.
Therefore, consultants make more money and organizations are spared the red tape and associated cost involved in adding and then terminating employees.
However, the Commonwealth of Massachusetts and the IRS do not agree. And in fact, the employment laws regulating this matter are in place in part to protect worker rights.
Consequences of Misclassification
Employees, even if they are temporary in status, receive baseline benefit coverage that independent contractors do not – including workers compensation and unemployment benefits. Nonprofit organizations cannot avoid their obligations as employers by arbitrarily classifying employees as independent contractors. Misclassification can have serious consequences.
The risk has increased recently as the IRS and Massachusetts Attorney General’s Office monitor these practices more closely. Penalties may include large fines, attorney costs and even the loss of 501(c)3 status.
A Straightforward Process
Properly classifying workers is quite straightforward. A temporary worker (at any level) may be considered an independent contractor only if the following three conditions are all met:
- The individual is free from control and direction in connection with the performance of the service.
- The service is performed outside of the usual course of business of the employer.
- The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
Thus, even if a worker meets condition number three in that they have their own consulting practice, as long as they perform duties that are part of the usual operation of an organization or report to a supervisor or board, they must be classified as an employee.
So, especially as the economy makes saving money even more important than ever, be sure that you do not cut corners in the hiring process. Using good hiring practices is not only the right thing to do, it’s the legal thing to do as well.