EMPLOYEE, CONTRACTOR, or SOMETHING ELSE? Why It Matters

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“What’s in a name?” asks Juliet—and so should business owners. Does it matter what you call an individual working for you? Though a rose might smell as sweet by any other name, not all labels are equal to the IRS. How you refer to your workers should accurately reflect your relationship with them, including how much responsibility you have for their taxes.

The Basics: Employees vs. Independent Contractors

Protecting yourself from liability and treating your workers fairly begins with understanding the difference between employees and independent contractors, but it doesn’t end there. Most people know to uphold minimum wage with, apply overtime provisions to, and pay over and withhold relevant taxes from employees. But who exactly counts as an employee? Since writing one off as an “independent contractor” can have financial and legal consequences, it’s important to make sure you grasp the official differences between the two.

Armed with this knowledge, you can start discerning special cases, such as when you should treat an independent contractor as an employee or, sometimes, a nonemployee.

Common-Law Employees

Common law dictates that anyone who works for you and whose work you have a right to control is your employee—no matter what you call them. ¹ There is no single litmus test to determine whether a worker is an employee, which the Fair Labor Standards Act defines as someone “economically dependent on the business of the employer, regardless of skill level”. ²

Of course, you can give an employee freedom, but they remain an employee so long as you retain the right to take that freedom away. A manager you don’t need to supervise and a part-time secretary whose work you dictate daily are equal, as far as employer-employee relationship status is concerned. An employer has the power to require a person to work or prevent them from working. Employees include individuals you lease out to clients and whose payment you control.

Having employees generally entails withholding and paying income, social security, Medicare, and unemployment taxes on any wages you give them.

Independent Contractors

While your right to behavioral and financial control marks the relationship between you and an employee, independence from your control marks the relationship between you and a contractor. Independent contractors are essentially people who get work done, for you and for others, in whatever way they want. Ultimately, they work for themselves; they are not economically dependent. In the words of the IRS, when it comes to contractors, you “have the right to control or direct only the result of the work and not the means and methods of accomplishing the result” (2014 Employer’s Supplemental Tax Guide 15-A).

There’s usually no need to withhold or pay federal taxes on payments to an independent contractor.

Common Differences Between Employees & Independent Contractors

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Other Classifications

In certain cases, an employee or independent contractor, as defined by common law, may be treated as something other for employment tax purposes. Statues have been written to address these particular situations.

Statutory Employees

A contractor may become a statutory employee if they are personally performing all the services themselves, don’t own the equipment or place they’re using, and work for you regularly. They must also be either a delivery driver (of a particular type), a full-time life insurance sales agent, someone who works at home according to your instructions and with your materials, or a full-time salesperson who sells your goods to other businesses.

You should withhold Social Security and Medicare taxes—but not federal income tax—from statutory employees.

Statutory Nonemployees

Three jobs do not fall cleanly into the employee or independent contractor categories. Though they might be working within an organization, the people in these jobs are usually considered self-employed for all federal tax purposes.

Direct sellers and licensed real estate agents are statutory nonemployees if their pay is related to performance rather than hours on the job, and if they agree by written contract not to be treated as employees for tax purposes. Companion sitters are usually considered statutory nonemployees, unless they work for a companion sitting placement service responsible for paying their wages.

Direct sellers, real estate agents, and sitters who meet these requirements are considered self-employed. If you hire them, you don’t need to withhold or pay over any federal taxes on their fees.

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Consequences of Misclassification

What happens if you classify an employee as an independent contractor? First, unless you have a good reason for doing so and have filed the appropriate returns, you are liable for their employment taxes. Secondly, you could be denying the worker benefits they need and deserve. Finally, Social Security, Medicare, state unemployment insurance and workers compensation funds, as well as the Treasury, all suffer.

The distinction between employee and independent contractor—and between contractor and nonemployee or statutory employee—is as important as it is nuanced. We’re always here to help you make this important case-by-case distinction.

The Deerfield Team
800.233.6428
j@deerfieldadvisors.com

  1. Department of the Treasury: Internal Revenue Service. “Publication 15-A: Employer’s Supplemental Tax Guide for use in 2014”. Accessed September 2014. http://www.irs.gov/pub/irs-pdf/p15a.pdf
  2. Department of Labor: Wage and Hour Division (WHD). “Fact Sheet 13,” revised May 2014. http://www.dol.gov/whd/regs/compliance/whdfs13.pdf

Making Better Hiring Decisions

Failure to Make Good Hiring Decisions~ 

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Half of all hiring decisions don’t work out; I hear money going down the drain of many restaurant establishments as I write this. The reason for this is pretty easy to deduce; either the restaurant owner makes the wrong decision or the candidate decides they are in the wrong job. When budgets are tight and failure is costly, the fine dining restaurant establishment cannot afford to hire the wrong person. So, how do you avoid being in the 50% of hiring decisions that don’t work out? Read on to gain access to the latest thinking and trends to “making better hiring decisions” for the fine dining restaurant establishment.

Hiring Process~ 

Why do some restaurant hiring managers make the wrong hiring decision? The number one mistake hiring managers make is trying to use a one size fits all hiring process—using the same assessments and process for each job. This type of thinking and process will almost always end in unhappy  and employees within the new hires first 18 months. Before you can even be-gin to look for job candidates, you must define the job—what behaviors, knowledge, experience and personal attributes are needed to do the job? If you miss one of these four items you will probably misdiagnosed, and miss the opportunity at identifying people who will succeed or fail as a restaurant employee. The next step in defining job success is to determine what you are willing to sacrifice and how that sacrifice will affect your quality of hire. For example, am I willing to train or do I need people who already have the skills, experience, and knowledge to do the job? There will more than likely be some sacrifice needed or it could take you months to fill the position. Identifying those sacrifices the best you can up front will save you lots of time and money.

Selection System Integration~ 

The second mis-take many restaurant hiring managers make is failure to use and implement a proper selection system. A selection system consists of pre-On-boarding once a candidate is hired includes orientation, training if applicable, development planning and mentoring. Implementing and adhering to a well designed selection system can make a major difference in a successful hire and your relationship with new employees. It also lends itself to assist you in identifying and resolving problems in your hir-ing process. Remember to al-ways define success in the job properly & utilize the information found in the pre-employment assessments. I do want to point out that if you are using an RPO (Recruitment Process Outsourcing) company, you should maintain ongoing conversations about the assessments they are using and how those assessments are working in your hiring process. The best practice is to always provide the RPO recruiters and even your own hiring managers with the feedback you receive from new hires during the on-boarding process.

Crucial Questions~ 

Once you begin using the selection system and seeing results, there are some crucial questions to ask to ensure sustainability of your selection system process. Are my assessments predicting success in the final interview and are they predicting win/win hiring decisions and predicting job performance & engagement? Does my final interview lead to acceptance at an acceptable rate? How do I compare to my competitors or a benchmark? And probably the most important question of all; how am I able to make predictions to increase talent in the future; given my business direction? Wow—that’s a lot of questions and seems a little overwhelm-ing—so you may ask how to quantify this information. Well, the days of gathering information for a hire and after the hire is made just putting it in a file and forgetting about it is over; that information is very valuable and should be used to assess your hiring process and create a template for each job. Once you have hired someone for a position, you have started a job template to be used the next time the position or a similar position needs to be filled. This process of creating the template for the first time is not an overnight process and should take a minimum of 6 months to 1 year to complete. The graph on page 3 can be used as a road map to accomplish and gather information to create your job templates.

A quick overview of the graph: 1) Candidate source is where you found the candidates or how they found you; 2) Assessment data is not only what assessments were used but how the candidates performed; 3) Once the final interviews are performed you should ask how satisfied your managers are with the quality of candidates; 4) You should track how often your job offers yield job acceptance; 5) During orientation, ask your new employee what they thought of the hiring process; 6) Follow-up interviews 6 months after the hire should be performed for the employee and managers to determine how the hire is going and 7) One year after the hire you should review how the employee has performed and how they have engaged with your company as a whole. If, at this one year mark, you have happy employees & managers and enhanced productivity you can proudly say you have a “successful hire.”

Being open-minded to change, combined with a little effort; can lead to avoidance of falling into the 50% of hires that don’t work category. But, more importantly, using the tools of defining your job, a selection system, and building job templates can save you money & time and leave you with happy restaurant employees which means enhanced restaurant operation productivity. And happier employees are less likely to decide they’ve chosen the wrong job. Remember, these steps work together, leaving one or more of them out will more than likely result in continued unsuccessful hires or create vulnerabilities in your hiring process. This is only a broad overview of these tools, so feel free to contact us for further information on how to begin implementing a successful hiring process for your restaurant.

As always, we are here to help you any way we can. Please don’t hesitate to call or email if you need us.

The Deerfield Team
800.233.6428
info@deerfieldadvisors.com

DISCLAIMER

This article is intended only as a general discussion of these issues & we cannot guarantee the accuracy thereof. It does not purport to provide legal, accounting, or other professional advice. If such advice is needed, please consult with your attorney, accountant, or other qualified adviser. The Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Accordingly, the information provided herein is provided with the understanding that Deerfield Advisors is not engaged in rendering legal advice. Deerfield Advisors strongly advises that clients and/or the reader of this publication contact an attorney to obtain advice with respect to any particular issue or problem discussed here. Also, please know that discussions of insurance policy language is descriptive only. We strongly advise that one’s individual policy & one’s advisor be consulted regarding this subject matter before any action is taken in any way. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. The Deerfield Advisor White Paper Series is a registered trademark of Deerfield Asset Management Inc. DBA, Deerfield Advisors and is produced by Deerfield Advisors for the benefit of its clients, and any other use is strictly prohibited. All rights reserved. Copyright © 2015