When hiring an educator for your child care business, what’s the difference between an independent contractor and an employee?

Classifying Staff: Contractors or Employees

Hiring an additional person to assist you with your child care business can be beneficial to you and your program.  When you have another reliable person, you can offer more quality experiences for the children in your care, you can possibly expand the number of children you serve, and you can have peace of mind knowing that someone can step in if you have an unexpected leave from work.  The question becomes: is your additional person an independent contractor or an employee?  This distinction is important and knowing that now will help your business and keep you from possible difficulties with the IRS.

Why does it matter if you have a contractor or an employee?

Contractors and employees are handled very differently under labor laws – this includes both federal law and state law. A contractor is treated as a completely independent worker, taking care of their own employment taxes, and often you, as the employer, have fewer legal duties to this type of worker.  Alternatively, if you have someone classified as an employee, you have more responsibilities to them and greater associated costs, such as employment taxes and benefits.

Seeing that the contractor classification is a less costly route, some child care business owners will choose to have a worker treated as a contractor when, according to guidelines, they should be treated as an employee – even when the worker would prefer the contractor classification. It is important to note, that the decision on how to classify a worker isn’t up to the employer or the worker.  There are labor rules that help you know if the worker you have hired is a contractor or an employee.

You don’t want to unintentionally misclassify someone as a contractor when they should be an employee as this can cost you time and money.  Even if you make an honest mistake, you could be liable for:

• 100% of the employer taxes that you should have been paying all along

• A portion of the worker’s contribution to payroll taxes – this means you would be paying a portion of the taxes that you would have never had to pay in the first place

• Criminal fines for thousands of dollars

• The price of any missed benefits and other employee compensation such as paid time off – things that the worker didn’t receive as a contractor

You must make the correct classification so you can avoid these potential risks.  Let’s look closer at how you can determine if you have a contractor or an employee.

You know it’s important to correctly classify your worker, but how do you figure out if you have a contractor or an employee?  To answer this question, let’s look at what the labor standards say.  The Labor Standards Bureau of Wisconsin has a six-part test to help you determine if your worker is an employee or an independent contractor.  These six parts guide you as you establish your worker as an employee or a contractor, and there is no firm line provided.  Instead, use these six guidelines to look at all the circumstances surrounding your relationship with the worker.  Essentially, the Bureau of Labor Standards views this test as a determination of whether the worker is economically dependent upon the employer.  You will need to look at your business’s overall relationship with the worker, using these six parts to fully examine their circumstances.  (If you have questions about these guidelines or the classification of workers, reach out to the Department of Workforce Development.)

Degree of Control – If you as the employer dictate when your worker is to work, in which way they are to do the work they’ve been assigned, and the details on how they are to do this work, then they are classified as an employee.  Here are some questions to ask yourself about this worker:

• Who establishes the routine or schedule of the work?

• Who determines what the worker should be doing and how they should do it?

• How is the worker paid? Is it by time or by the job?

• Does the employer require the worker to attend meetings?

• Are taxes deducted or withheld from the worker’s checks?

• Does the worker receive fringe benefits or bonuses?

After answering the questions and thinking more about the employment relationships, if the answers lead you to believe that the employer in essence controls the work of the worker, then the worker is most likely an employee.

Profit or Loss – A worker who can either gain a profit or suffer a loss of income as a direct result of their work is generally an independent contractor.  If the worker gets paid set wages regardless of realized profit or loss generated from their actions, they are generally an employee.

Investment – This part refers to the worker’s investment into either equipment or the employment of other helpers to do the job.  If a worker invests their own money into equipment, such as tools or vehicles that are required for work on the job (for example, someone who has to buy their own tow truck for a towing business), then that usually means they are an independent contractor. Similarly, if the worker (not the employer or the program) needs to hire other helpers to do the work, then that means they are most likely a contractor.  On the other hand, if the worker uses tools or equipment on the job that is provided by the employer, then that generally means they are an employee. 

Special Skill – Part four refers to the degree of a specialized skill or expertise to do the work, and this can get a little tricky.  Workers who have a unique or niche skillset and exercise initiative in obtaining clients or jobs are more likely to be independent contractors. Plumbers, electricians, or accountants are good examples of those you might hire to do a particular job at your business.  Consider if the person advertises or promotes their skill on the web or with business cards; they are likely a contractor.  Conversely, if the worker’s job with you does not require a lot of specialized training or experience, and it’s performed in your facility routinely, this person is most likely to be an employee.  Again, this distinction is not always clear; you can read case studies here from the Wisconsin Department of Workforce Development. 

Degree of Permanence – This refers to the relationship between the employer and the worker.  The degree of permanence, or steadiness, in the working relationship, helps to determine if the position is a contractor or an employee.  Here are a few questions to consider:

•  Is there a continuing, open-ended relationship between the employer and the worker?

• How long has the job lasted? Is an ending date contemplated upon the completion of work?

• Do both the employer and the worker believe they are creating an employer/employee relationship?

Integral Part – For this final part, consider if the job the worker is fulfilling is an essential part of the business.  In other words, the services provided to the employer by a contractor must be very different from the employer’s business to be classified as an independent contractor. Instead, if the worker’s services are essential to the ongoing success of the business, then it’s likely that that worker is an employee.

Here are some next steps to consider when it comes to classifying workers:

1. Think through the needs of the position before you hire someone.  If needed, run through the six-part test before you mistakenly hire someone as a contractor and then have the liabilities that come along with it.

2. If you think you may have one or more misclassified contractors, pause, and revisit the six-part test.  Look at the specific roles and the workers as individuals (if there is more than one) and carefully consider each part listed above.  Seek help from a human resource or legal professional about what to do if you find a worker has been misclassified.

3. Whenever you are in doubt, seek advice from a human resource or legal professional.  Potential misclassification of workers could come with large penalties.  It’s worth the cost to invest in professional advice if you have questions or want to know how best to proceed.