If you hire independent contractors or temporary workers for your business, you must have a worker classification program in place.
You might ask what the purpose is, and you’ll probably ask why you need one. What does this type of program do?
This guide will help you understand what a classification program is designed to accomplish, and why you must implement one.
The Ongoing Issue of Worker Classification
As the gig economy continues to gear up, work is changing. More people are moving away from the traditional employer-employee relationship. In Canada, self-employment is on the rise.
This changes the traditional workplace relationship. Self-employed individuals are commonly identified as independent contractors, and your responsibilities to them will vary. They are not employees, and you must treat the two classes of workers differently.
The same may be true for other types of employment. For example, temporary or seasonal employees may not be entitled to the same protections as permanent employees. Full-time workers may receive different benefits than part-time workers.
You can see why it’s so important for employers to clearly identify the different classes of workers they employ.
Governments Take Aim at Worker Misclassification
As temporary and contract employment arrangements grow in popularity, it’s become easier for employers to misclassify the people they work with. Governments have been increasingly concerned about this. In the United States, the IRS has initiated a worker misclassification program. The IRS will rule on the classification of an individual at the request of the worker or the employer. Some states have introduced their own legislation and penalties for worker misclassification.
The situation is a little different in Canada, but there’s been growing concerns about the misidentification of worker types. Specifically, there’s concern some employers purposefully misclassify employees as independent contractors in order to put tax burdens on the employees.
In some cases, misclassification is completely accidental. You may believe someone is an employee, but they actually meet the definition of an independent contractor. In this case, you may be paying into programs like Employment Insurance incorrectly.
The situation around part-time, full-time, temporary, and contract employees may also be confused, which can lead to mistakes in your payroll taxes.
The Solution to the Issue
A worker classification program is the solution to the problem. If you hire independent contractors, the best thing you can do is develop a strong classification program.
This program will clearly identify the types of workers you hire. It will allow you to differentiate between types of workers, so you can be sure you’re classifying them correctly.
You must ensure you’re complying with local law. For example, in the US, you’ll want to consult with the IRS’s definitions of employee and independent contractor. The IRS makes clear distinctions in the relationships between contractors and employers, and employees and employers.
If you have control over how a worker completes a job, you likely have an employee on your hands. If the worker can make decisions about the materials, equipment, and even timing of the project, then you’re probably dealing with an independent contractor.
What Happens If You Misclassify a Worker?
As mentioned above, some governments have been taking a stance on employee misclassification. Depending on where you operate, you may face stiff penalties for employee misclassification even if it was accidental.
If you misclassify an employee as an independent contractor, you may be responsible for back payments for Employment Insurance, CPP, taxes, and benefits.
This is why it’s so important to have a worker classification program. There’s a far lower chance you’ll misclassify a worker, which helps you avoid penalties. If you’re unsure, ask for help understanding the regulations in your area and what you can do to ensure you comply with the law.