I’m an employer. In addition to paying wages, I also have to pay payroll taxes and unemployment taxes as well. I’ll be honest with you. It can be a pain in the behind.
I’m guessing that a lot of employers feel that way. Some hate dealing with payroll so much, that they don’t hire “employees” they just make everyone be “contract labor”. Here’s the thing—misclassifying your employees as contract labor is illegal.
Seriously illegal! Did you know that employers in Missouri who misclassify their employees as contract labor face penalties between $50 and $1,000 a day per worker and/or up to six months in jail per violation? In addition to that—yes, there’s more—the employer could also pay a penalty of 25% of the amount that the state was defrauded. (Yeah, they consider misclassifying employees to be a form of fraud.) If the employer has no basis for classifying the worker as contract labor, he’ll also be held liable for the employee’s unemployment contributions.
Here’s the big one though: Knowingly failing to insure workers’ compensation liability under the law is a class A misdemeanor, and is also punishable by a civil penalty of up to three times the annual premium the employer would have paid had it been insured or up to $50,000, whichever is greater. (You got an extra $50,000 lying around? I don’t.)
Do I have your attention yet? If you mess around with labeling employees as contract labor when they should be employees, you’re risking huge fines and jail. Suddenly, paying those payroll taxes doesn’t seem like such a burden after all.
So how do you know the difference between whether the person you hire should be a contract laborer or if you need to put him on the payroll as an employee?
Here’s a very over-simplified answer: control. Who has control of the employee’s work? Do you set the time and location of the person’s work? Do you provide all the tools and materials? That sounds like you have an employee. Does the worker also work for other companies doing a similar type of work? That sounds like contract labor. The quick and dirty analysis is—if you’ve got complete control over the person’s work—then that person is an employee. If the person does the same work for other people, controls pricing, etc., then they’re contract labor.
It’s not always easy to determine. Like I said, I just gave an oversimplified answer. The state of Missouri has a free booklet out that explains it pretty thoroughly. Here’s a link to get it: http://www.labor.mo.gov/DES/Forms/M-INF-310-AI.pdf .
If you have any questions about whether your contract laborer should be reclassified as an employee or not, then you need to read the whole booklet. It’s not a hard and fast “rule book” but rather guidelines of twenty areas that you can look at to see whether your worker falls into the employee or contract labor category. If you read the pamphlet and you’re still unsure about how you should classify somebody, call the Missouri Department of Labor and talk to one of their representatives. The main switchboard number is: 573-751-3215. I had to call them and they were friendly and helpful.
It’s really important to classify your employees properly. Missouri has the tools you need to make sure you do it right. If you’re still confused, they’re willing to help. There’s no excuse for messing this up.