THE BLOG
11/30/2009 05:12 am ET Updated May 25, 2011

Jobs: Optimism Has Employers Hiring Again

But Many Jobs Are for Independent Contractors and Benefits and Health Insurance Are Hard to Get

Encouraging signs in the job market have many employment seekers cleaning up their résumés. Although there is some reason for optimism, you may have to accept something less than full-time employment for the present. That is because cautious employers would rather hire part-time workers and independent contractors until more convincing signs of economic recovery begin to filter into their companies.

Unfortunately, this can mean that many part-time workers will have to forgo employee benefits such as health insurance, contributions to a 401(k), and vacations. Even more so, independent contractors will only get hourly compensation or a flat dollar amount for completing specific tasks.

But employers who think they can avoid payroll tax and employee benefits by mischaracterizing independent contractors may be in for a surprise. The Internal Revenue Service, Labor Department, and even local state governments may disagree and the consequences can be severe.

In one example, Maria used part-time, independent contractors in her small catering company during the holidays and when she had a surge of business. Her accountant advised her to do so because it was clearly within the IRS regulations. Therefore she did not withhold payroll tax or offer them any of the benefits that she gave to her permanent employees. Everyone was happy with this arrangement until a Labor Department inspector walked into Maria's shop.

The inspector said that even though the IRS rules were followed, the Labor Department had different concerns. IRS deals with tax issues while the Labor Department protects employees. Consequently it applies different tests to determine whether or not workers are independent contractors or employees. Furthermore, Maria was told to immediately reclassify her independent contractors as employees and pay back the payroll taxes that she failed to withhold over the years. And as “gift” for quick compliance, the Labor Department agreed not to levy penalties for noncompliance.

Most states have additional regulations. In Florida, for example, the state categorically eliminated the independent contractor category in the construction trades, for the purpose of workers’ compensation compliance. Instead, Florida requires sole proprietors in the construction trades to form LLCs or incorporate. They can apply for an exemption from buying workers’ compensation if they have three employees or less. Otherwise they become employers and must purchase workers’ compensation insurance for their employees.

Meanwhile, IRS differentiates independent contractors from employees based upon the degree of control that you have over your workers. More specifically, they look at three categories: behavioral control, financial control and the type of relationship of the parties.

Maria found out her accountant’s advice was correct regarding IRS, but not the Labor Department. The DOL has additional criteria because they wanted her to comply with the Fair Labor Standards Act. It deals with minimum wage laws, payment of overtime wages and child labor laws.

You can download an IRS pamphlet explaining how to classify your workers here. For more information about the Labor Department’s requirements, go to its Web site, www.dol.gov. To get information for any state government, download SBA’s state guides at www.sbaguides.com.

Finally, a good business accountant and lawyer can help you wade through the government’s red tape and defend you in court if it becomes necessary.

Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA’s 2006 national “Journalist of the Year” award winner, tenonline.org/sref/jc1bio.html. He is a former entrepreneur, commercial mortgage banker, and business lender.