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Sep22

Converting employees to contract labor

I have a small company and employees who do work from their homes. I would like to convert them to contract labor. Most of them do contract labor for other companies and all should fall into the guide lines of contract labor. Can I just change them at the end of the 3rd quarter? I have spoken with all of them and they know this is in the works. Are there any pitfalls I should be watching for? Where can I find the regulations for contract labor?
Thank you for your help.
Cindy White

If the workers genuinely meet the guidelines for independent contractors, then you may convert them to that status at any time, as long as the worker is informed in advance. Because you are terminating these employees and then entering into an independent contractor relationship with them, you will need to meet all the legal requirements for terminating an employee in your state. For example, if your state requires that employees be paid for unused vacation at termination, you will have to comply.

Also be aware that a terminated employee who chooses not to accept the independent contractor arrangement would qualify for unemployment benefits.

Bear in mind that some unethical employers use this tactic to illegally avoid paying overtime and unemployment insurance — so the IRS and U.S. Department of Labor may scrutinize your decision and question the independent contractor status.

In general, if you control when, where or how a person works, they are an employee, not an independent contractor. If they are free to work when, where and how they please, then they may be an independent contractor. Employees receive a W-2 at the end of the year, and have taxes withheld. Independent contractors are small business owners who work for themselves. They receive a 1099 at the end of the year.

Simply working from home in itself does not guarantee that a person is genuinely an independent contractor.

Read more about independent contractors at: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html  and http://www.irs.gov/pub/irs-pdf/p1779.pdf  and http://www.dol.gov/oasam/programs/history/herman/reports/futurework/conference/staffing/9.1_contractors.htm

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This entry was posted on Tuesday, September 22nd, 2009 at 1:42 pm and is filed under
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4 Responses to “Converting employees to contract labor”

  1. Judith Benson Says:

    As a former employment tax auditor for the IRS I can tell you that this is very risky.

    Former employees used as independent contractors are a prime target for reclassifcation by both state and IRS auditors. Remember, you have to be able to prove that they are independent business entities and that the working relatinship between you and them is not an employer / employee relationship.

    Working from their own home office does not carry much weight in proving independent contractor status. Too many companies have their employees working from home on a regular basis today.

  2. Caitlin Says:

    Hi Judith! Thanks for making an excellent point! We agree that this employer needs to consider carefully whther these workers are actually independent contractors or not! ~ Caitlin

  3. renaissance dresses Says:

    Wonderful insight

  4. Caitlin Says:

    Thanks for the kind words renaissance!~ Caitlin

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