Independent Contractor or Employee?
Tuesday, 3 January 2017
by Staff, Spaulding Law
• Employers do not need to pay unemployment insurance taxes or other payroll taxes for independent contractors, as they do with employees. Independent contractors are not eligible to file claims for unemployment benefits (Utah Code § 35A-4-204).
• Independent contractors are not covered by the Utah Workers' Compensation Act and are not eligible to receive or file workers' compensation claims. This means employers can save money by not obtaining workers' compensation coverage for independent contractors.
• Employers must withhold income tax, social security, and Medicare taxes for employees. They are also responsible for paying social security, Medicare, and unemployment taxes on wages. Independent contractors, however, are required to pay their own income tax and self-employment tax and businesses are not required to withhold any taxes.
These benefits are very attractive, but not all workers will qualify as independent contractors. In order to meet the regulations for the Utah Employment Security Act, Utah Worker’s Compensation Act, and Utah State Tax Commission, an independent contractor is customarily engaged in an independently established trade, occupation, profession or business of the same nature as the services performed, and the individual providing the services must be free from the employer's control and direction while performing services for the employer (Utah Admin. Code r. 994-204-301(1)).
A worker must clearly establish his status as an independent contractor by taking steps that demonstrate independence indicating an informed business decision has been made (Utah Admin. Code r. 994-204-301(1)). They ought to be:
• Independent of the employer in all that pertains to the execution of the work.
• Not subject to the routine rule or control of the employer.
• Engaged only in the performance of a definite job or piece of work.
• Subordinate to the employer only in effecting a result according to the employer's design. (Utah Code § 34A-2-103(2)(b)(i).)
A worker is considered to be independently established if:
• They have an independently established trade, occupation, profession, or business that is created and exists apart from a relationship with a particular employer and does not depend on a relationship with any one employer for its continued existence (meaning they are non-exclusive and regularly do work for other clients).
• Separate place of business.
• Provide their own tools and equipment.
• Can realize a profit or risks a loss from expenses and debts incurred through an independently established business activity.
• Advertises their services.
• Has a business or professional license.
• Maintains business records including tax forms.
The following list is indicative of the control and direction an employer would have over an employee and should be avoided if you want to classify a worker as an independent contractor:
• Lack of freedom over the manner and means by which the result is accomplished.
• Requirement to comply with instructions on how the service is to be performed.
• Provision/requirement of training that indicates that the service is to be performed in a specific method or manner.
• Requiring work to be performed at a specific pace or ordered sequence.
• Requiring that the work be performed on the employer’s premises.
• Requirement to perform the work personally with no right of assignment.
• Continuous relationship – work is performed regularly or at frequently recurring intervals.
• Set hours or specific number of hours to be worked.
• Payment by the hour, week, or month points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying progress billings as part of a fixed price agreed upon as the cost of a job. Control may also exist when the employer determines the method of payment.
It is important to know if your worker meets the requirements listed above because there are serious consequences for misclassifying an employee as an independent contractor. Knowingly making a false statement under the Employment Security Act to avoid or reduce the obligation to pay unemployment compensation is a criminal offense. The degree of the offense depends on the total monetary value sought to be obtained by the false statement (Utah Code § 76-8-1301). There are no penalties for improper classification through the Utah State Tax Commission. However, employers who misclassify workers may be liable for additional tax.
Intentionally, knowingly or recklessly misclassifying an employee as an independent contractor to avoid the obligation to obtain insurance coverage constitutes workers' compensation insurance fraud. Workers' compensation insurance fraud is punishable by:
• Imprisonment of up to one year or a fine up to $2,500, or both, if:
o the value of the property, money or other thing of value sought be to obtained is less than $1,000; or
o the number of individuals not covered is less than five.
• Imprisonment of up to five years or a fine up to $5,000, or both, if:
o the value of the property, money or other thing of value sought be to obtained is between $1,000 and $5,000; or
o the number of individuals not covered is five or greater, but less than 50.
• Imprisonment of between one and 15 years or a fine up to $10,000, or both, if:
o the value of the property, money or other thing of value sought be to obtained is $5,000 or greater; or
o the numbers of individuals not covered is 50 or greater. (Utah Code §§ 34A-2-110, 76-3-203, 76-3-204 and 76-3-301.)
In addition, employers who fail to comply with the Workers' Compensation Act may be liable in a civil action to their employees for:
• Damages suffered by reason of personal injuries arising out of or in the course of employment.
• Necessary costs.
• Reasonable attorneys' fees. (Utah Code § 34A-2-207.)
This information is made available by Spaulding Law for educational purposes only and not to provide legal advice. By using this website, you understand that there is no attorney-client relationship between you and Spaulding Law, unless you have entered into a separate representation agreement. This information should not be used as a substitute for competent legal advice from a licensed professional attorney.