If you have WORKER'S, in USA, READ THIS:

I summarised the document for you by collating the most simple paragraphs…

Is Your Worker an Employee, or not?

JULY 15, 2015

SUBJECT: The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.


Ultimately, the goal is not simply to tally which factors are met, but to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).

The factors typically include: (A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.4

If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer.


In considering whether a worker has an opportunity for profit or loss, the focus is whether the worker’s managerial skill can affect his or her profit and loss.7 A worker in business for him or herself faces the possibility to not only make a profit, but also to experience a loss. The worker’s managerial skill will often affect opportunity for profit or loss beyond the current job, such as by leading to additional business from other parties or by reducing the opportunity for future work. For example, a worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables may reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job.

A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs. The worker regularly agrees to work additional hours at any time in order to earn more. In this scenario, the worker does not exercise managerial skill that affects his profit or loss. Rather, his earnings may fluctuate based on the work available and his willingness to work more. This lack of managerial skill is indicative of an employment relationship between the worker and the cleaning company.


The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business. An independent contractor typically makes investments that support a business as a business beyond any particular job. The investment of a true independent contractor might, for example, further the business’s capacity to expand, reduce its cost structure, or extend the reach of the independent contractor’s market.A worker providing cleaning services for a cleaning company is issued a Form 1099-MISC each year and signs a contract stating that she is an independent contractor. The company provides insurance, a vehicle to use, and all equipment and supplies for the worker. The company invests in advertising and finding clients. The worker occasionally brings her own preferred cleaning supplies to certain jobs. In this scenario, the relative investment of the worker as compared to the employer’s investment is indicative of an employment relationship between the worker and the cleaning company. The worker’s investment in cleaning supplies does little to further a business beyond that particular job.


A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent. “[T]he fact that workers are skilled is not itself indicative of independent contractor status.”


Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. After all, a worker who is truly in business for him or herself will eschew a permanent or indefinite relationship with an employer and the dependence that comes with such permanence or indefiniteness.


As with the other economic realities factors, the employer’s control should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent businessperson. The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.


In sum, most workers are employees under the FLSA’s broad definitions.

The factors should be used as guides to answer that ultimate question of economic dependence. The correct classification of workers as employees or independent contractors has critical implications for the legal protections that workers receive, particularly when misclassification occurs in industries employing low wage workers.


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My accountant, who is wonderfully “creative” (read: shadily works the system) refuses to E-file.
His argument is the Government doesn’t SAVE money- they SPEND money.
(Its like a marketing budget: use it or lose it)

Meaning, the less Data Entry types needed, the more that money will shift over
to things like tightening up loopholes, researching, and a larger auditing force.

I NEVER get political, and I don’t even think this IS a political thing…
This is just one of those things that make me say, “hmm maybe he was on to something.”

good post perry. for years, i never put anyone on payroll, just classified them as subs. even if they pretty much only worked for me. i reasoned that “hey, they have their own tools, i’m flexible with their schedule, they do side jobs all the time, they work for other businesses when we are slow in the winter” yada yada…

and I also figured “hey, i’ll just pay them more hourly, then i don’t have to deal with all the paperwork- quarterlies, unemployment tax, payroll mumbo jumbo etc- having to match social security is like throwing money down the toilet!”

after i read about what an employee is and isn’t, and also after i decided to really get serious about my business, i decided that my reasoning was just plain wrong. i was lazy and cowardly, and dishonest. trying to avoid the tax burden and hassle that comes from playing the “subcontractor” game is just the wrong thing to do. it’s not better for anybody.

your employees (who depend on you for their livelihood) lose out on so much- unemployment insurance, matched funds going into their social security accounts, all the rights and protections that come along with working for a real business etc.

your business doesn’t benefit. if you try to avoid your responsibility it hurts you in a lot of ways. opens you up to scrutiny and prosecution by the IRS. breaks all your financial numbers so that you don’t really have an accurate read on how your business is doing. steals a certain feeling of security and stability from the employee. …
… and probably the most underestimated problem of trying to play that game is the effect it has on you as an owner. your business is simply NOT legit until you are handling your employees the right way financially. it’s a house of cards built on a foundation of sand. that has an effect on your mentality as an owner and really skews your vision of the direction of your business. if you can’t make a commitment to the people who help you get all the work done, generate the profits, interact with your most valued asset (your customer), how can you commit to anything else in your business?

one of my biggest regrets about the early years of my business is that i didn’t reason on all of this properly. i tried to rationalize the whole thing, saying “it’s easier for everybody and cheaper for me to try to avoid payroll”. well, i may have paid less in total wage burden overall, but i paid a much higher price in motivation, stability as a business, ability to retain long-term talent and many other ways.

i finally embraced the fact that in order to have a REAL business, I have to structure it the right way. accepting that has had a HUGE impact on my outlook. I have way more motivation and a stronger sense of urgency to build, maintain and streamline my business so that i can hire and keep great employees and compensate them well. doing things above board and not trying to walk the line has taken the fear of getting busted off my shoulders too. knowing that i have a heavy responsibility to make my business work within the parameters of what’s legal and right in connection with my employees has given me a lot of focus. that focus has trickled down to literally every single other aspect of the business.


Great Post!

Ah yes…the Uber bust…


I think what happens most of the time is the solo Guy gets so busy he needs a helper but financially as well as not trusting the work doesn’t want to commit to an employee. So you go the sub route. I don’t disagree with it and it isn’t illegal if done right. I subbed out plenty of work to window cleaners with their own businesses who didn’t have the workload I was able to generate. I was unwilling to have an employee at $15 an hour costing me $27 an hour with Worker’s Comp. insurance and taxes. But I wanted the extra money subbing brought me.

With that said if you’re in it for a business not just seasonally busy employees and everything on the up and up is the only way for long-term success

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that’s totally right, i never thought about it like that, but that’s pretty much the profile i fit into way back when.

and yeah, subcontracting if done right can work great. you did it the right way, brian. but one has to commit to one or the other. if you try to fudge it like i did for awhile it’s only going to hold you back.

bottom line- if the guy gets his regular paycheck from you, goes where you tell him, does whatever you tell him to do whenever you want him to do it, uses even just a bit of your equipment on a regular basis, is considered by your customers to be “your guy”… then he’s an employee. treat him as such and stop trying to get over.


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Fines and Ramifications
Penalties associated with incorrect classification

It is critically important to recognize who among a workforce is an independent contractor subject to 1099 rules and who is actually an employee. Misclassifying employees as independent contractors and failing to provide W-2 forms can subject an employer to back taxes of as much as 41.5%* of the contractors’ wages, according to the IRS. And these penalties can go back for three years.

*A breakdown of back tax penalties:
15.30 % Social Security Tax (on income up to the cap, plus 2.9 % of income above that cap)
20.00 % Federal Income Tax
+6.20 % Unemployment Insurance
41.50 % of the contractor’s pay

Unintentional Misclassification

Even unintentionally misclassifying employees as independent contractors or paying them “under the table” may result in significant penalties and interest. For example:
Potential Fine
Incorrect Filing Penalties (W-2 or 1099 forms)
$50 for each form that you failed to file (W-2 or 1099). $50 per employee for failing to provide employee with a W-2 or 1099 form.
Failure to withhold income taxes
1.5% of the wages plus interest accruing daily, plus 40% of the FICA that the employee should have paid and 100% of the FICA employer should have paid.
Failure to pay taxes
0.5 percent of the unpaid tax liability for each month up to 25 percent of total tax liability.
Failure to obtain Social Security number
$50 for each failure to obtain Social Security number
Intentional or Fraudulent Misclassification
If the IRS suspects fraud or intentional misconduct in employee classifications—in other words if it believes a company deliberately misclassified its workers to avoid taxes—additional fines can be imposed, including criminal penalties. For example, if the IRS determines that employee classifications were intentionally adjusted to avoid overtime pay, the employer could be subjected to penalties that include 20% of all wages paid to the worker, and 100% of FICA that should have been withheld, including both employer and employee portions. In addition, unpaid overtime premiums alone can represent substantial monetary amount, depending on the size of the workforce and the length of time that overtime pay was withheld from eligible employees.

The IRS may levy criminal penalties of $1,000 and/or 1 year in prison for failure to properly classify and withhold wages. If the IRS obtains a felony conviction against a person or company for “attempting to evade or defeat tax,” the fines are up to $100,000 ($500,000 in the case of a corporation), or imprisonment not more than 5 years, or both, together with the costs of prosecution (I.R.C. §7201).
Finally, a responsible person (including corporate officers and employees or members or employees of a partnership) with authority over the financial affairs of the business who willfully fails to collect and pay taxes may be held personally liable for the total amount of the uncollected tax up to 100% under the provisions of the Internal Revenue Code (I.R.C.), as well as subjected to criminal prosecution.

Independent contractors who wrongfully benefited as a result of being paid on a 1099 are virtually free from penalties, although the IRS may audit them and require them to eliminate any business deductions they took. The main focus, however, is on the entity with the deepest pockets–in most cases, the company.

Contact the IRS for further information about fines and penalties for fraud and negligent failure to properly classify workers, and failure to withhold taxes and/or file correct forms.


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Awesome post Perry…

Really need to take the time to visit this when I have a more time.

This is a great thread. Had to jump in. I just want to say that everyone has pretty much covered everything. Big takeaways:

  1. You aren’t doing anyone any favors by treating your EMPLOYEES as subs
  2. You are hindering your business
  3. You do not have a valid business model - if you can’t afford to hire an employee, you are doing something wrong.
  4. You don’t have a grip on your financials and never will
  5. And above all else. You hurt the people that depend on you the most, the most

I can also tell you from personal experience that I get the best and keep the best employees for a long period of time because they make a living wage and they finally know the security of getting a real paycheck with real benefits. Being 100% legit has allowed me to grow at the rapid rate that I am. Not only because of the great employees but also because, you can’t get the big profitable jobs without being 100% legit. Building owners have to have a copy of their subs workers comp, GL insurance, etc. And because of that, they pay the right price for the right service.

Funny how people think that the bigger the company the better. Talk about egos. “Well if you can’t afford to hire someone then something is wrong” BS. I know several solo guys including myself who have been doing it for many years and are doing very well financially. This whole notion that big companies is the way to go to be “Legit” or "Real business model"is kinda nonsense. Bigger does not translate to better. Get real bro get off your high horse donkey!!

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you missed the whole point of the post above yours. nobody is saying going solo isn’t “legit”. but if you are solo and really “doing very well financially”, then you CAN afford to hire a legit employee. you may just choose not to.

the whole point of this thread isn’t “which business model should I choose? solo/micro business vs larger multi-employee business?” it’s this: “if i’m going to hire, i better do it right.”

now i’ll step aside so [MENTION=38575]FastFanner[/MENTION] can say something about your panties.

I wear leotard speedos cause it makes me go fast and talk like Mickey Mouse

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I didn’t mean to make it sound like being solo isn’t legit. I am solely speaking of those who do hire employees. If you hire someone and you trying to treat them like a sub contractor, that’s wrong and that’s what I’m referring to.

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Interesting example here

Home cleaning startup Homejoy is shutting down - Fortune

What Really Killed Homejoy? It Couldn’t Hold On To Its Customers - Forbes

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Yeah buddy. Seeing as how these two BOTH have valid points I won’t tell them to shove their face in the sand but the first sign of silliness out of their mouth I will direct them to the corner. DO NOT PASS GO…