Blackwater Worldwide has been in the news for a long time now.  Hired by the U.S. Government to do various contracting work in Iraq, it’s been under investigation for all sorts of things.  Congress has just announced something else Blackwater is being investigated for: treating employees as independent contractors.

I don’t know what this investigation will show, but I know that Blackwater wouldn’t be alone in engaging in this activity.  Some employers do it innocently.  They just think you can choose to make a worker an employee or an independent contractor.  They particularly think that if the worker signs a document called “independent contractor agreement.”  Some employers know better, but since everyone else is doing it, what the heck.

What’s the big deal?  If a worker is an independent contractor, you don’t have to withhold federal and state income taxes, you don’t have to withhold social security and medicare, you don’t have to worry about normal employee benefits, you don’t have to pay premiums for unemployment compensation, etc.  Increasingly, the feds and state governments are going after employers who misclassify workers as independent contractors.  If you’ve messed up, you’ll owe taxes, penalties, fines, premiums, etc.  You may even owe the workers something, because they should have been treated as employees.

How do you know if a worker is an employee or an independent contractor?  The main question is who controls the work being done.  If you control it, the worker is an employee.  If the worker controls it, he/she is an independent contractor.  And how do you determine control?  The 20 factor test used by the Internal Revenue Service is still a good starting point for answering that question.  Click here, here, and here.

Here are some simple points to remember.  The fact that you have an “independent contractor agreement” with the worker isn’t determinative.  If a worker is doing what other employees do, he/she is likely to be an employee irrespective of an agreement that says otherwise.  If the worker performs work only for you, as opposed to performing work for multiple companies, he/she is likely to be an employee. 

A plumber is an independent contractor.  A house painter is an independent contractor.  An electrician is an independent contractor.  An IT worker who sits next to your other IT employees all day long doing what the other IT employees do is an employee.

You need to occasionally do an audit on this.  Determine how many independent contractors you have.  Determine what they’re doing.  Determine if they do work for other companies in addition to the work they’re doing for you.  Compare what they’re doing with what your employees are doing.  If you have a lot of workers classified as independent contractors, you need to take a close look at the situation.  If you don’t and if you’re audited or sued, you could be looking a big wad of money in fines and penalties, just for starters.