What is the difference between sub contractors and employees?

What is the difference between sub contractors and employees?

My son works for me part time, and I pay him by 9-41.  Do I need a worker's compensation policy?

The department of labor draws a very fine line between employees and independent contractors.  They have come up with a list of twelve characteristics that qualify an independent contractor.  

(a) The person possesses or has applied for a federal employer identification number or social security number, or in the alternative, has agreed in writing to carry out the responsibilities imposed on employers under this chapter.

(b) The person has control and discretion over the means and manner of performance of the work, in that the result of the work, rather than the means or manner by which the work is performed, is the primary element bargained for by the employer.

(c) The person has control over the time when the work is performed, and the time of performance is not dictated by the employer. However, this shall not prohibit the employer from reaching an agreement with the person as to completion schedule, range of work hours, and maximum number of work hours to be provided by the person, and in the case of entertainment, the time such entertainment is to be presented.

(d) The person hires and pays the person’s assistants, if any, and to the extent such assistants are employees, supervises the details of the assistants’ work.

(e) The person holds himself or herself out to be in business for himself or herself.

(f) The person has continuing or recurring business liabilities or obligations.

(g) The success or failure of the person’s business depends on the relationship of business receipts to expenditures.

(h) The person receives compensation for work or services performed and remuneration is not determined unilaterally by the hiring party.

(i) The person is responsible in the first instance for the main expenses related to the service or work performed. However, this shall not prohibit the employer or person offering work from providing the supplies or materials necessary to perform the work.

(j) The person is responsible for satisfactory completion of work and may be held contractually responsible for failure to complete the work.

(k) The person supplies the principal tools and instrumentalities used in the work, except that the employer may furnish tools or instrumentalities that are unique to the employer’s special requirements or are located on the employer’s premises.

(l) The person is not required to work exclusively for the employer.

As long as all of these characteristics are true for your sub contractor, then paying them as a subcontractor on a 9-41 and not carrying a workers' compensation policy is valid.  However, if even one of the distinguishing characteristics are not true, then you need to have a workers' compensation policy to cover that employee in the event of a loss.  The reason the department of labor is so careful and strict with these classifications is that there have been many situations that business owners are qualifying employees as subcontractors incorrectly, and in the event of a loss, the sub contractor looks to the employer for their medical bills to be paid.  To avoid any gaps many business owners are writing 'if any' workers' compensation policies, this will protect you and your business in the event that your employee was incorrectly classified as a sub contractor and there is a loss.

If you have questions regarding sub contractors vs. employees, please call us at 603-352-2121.

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