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September 1, 2015

How to hire a contractor for your organization’s everyday work

VMC_Office_with_Person IMG_0333-2_webBy Mala Nagarajan

As a nonprofit leader in need of staff, you may be tempted to hire a contractor (aka consultant) to fill a vacancy. Maybe you think it’ll be easier to get rid of the person if it doesn’t work out. Or perhaps you don’t have secure funding, and you don’t have the heart to let a person go. Temporary positions are a great way to let the candidate check the organization out and to let you check out the candidate. And the 1099s your accountant completes for your payments to an independent contractor are a lot less burden than the administration and cost of new employee hires (e.g., I-9, healthcare and retirement paperwork, unemployment taxes, worker’s compensation fund contributions, FICA taxes, paid breaks or medical leave).

But wait! Don’t do it.

As a general rule, positions that are central to the mission of your organization should be employee positions. Filling your position, temporary or not, with a contractor may put your organization at legal risk.

Don’t follow the pack

“All our peer organizations are doing this,” you say. Your colleagues may suggest you can choose to hire a contractor or an employee to fill your position. Perhaps they tell you as long as you create a contractual relationship with a worker, let the worker set their schedule, and have the worker use their own computer, then they’re an independent contractor. Not necessarily so. Consider recent decisions in the Uber and Lyft class action suits. Just allowing workers to schedule their own work hours or requiring workers to supply their own equipment is not enough to rule out employee-status.

Two governmental agencies provide some guidance to help employers and employees figure out the appropriate worker classification: The IRS and the Department of Labor.

The Internal Revenue Service (IRS) looks at the degree of behavioral and financial control and independence, as well as the type of relationship between the organization and the worker to determine if a person should be classified as an employee or contractor. The IRS uses a 20-point factor analysis to determine 3 overarching conditions:

(1) Behavioral Control. Do you want the work to be done a particular way? Do you have a specific set of instructions or training, or an order in which you want the work done? Or maybe you want a specific individual in the company to do the work because you’re hiring that individual, not the company, really. And what they produce is critical to the success of your funded program, so you don’t want someone under-qualified doing the work. All of these practices point to a person being classified as an employee.

(2) Financial Control. Are you paying hourly, weekly, or monthly? Or perhaps you require the worker to work a minimum set of hours? Or so many hours that there is no possible way for the contractor to take on other jobs? Or require them to submit regular reports? Or maybe you want the individual to work on your equipment?

(3) Type of Relationship. Perhaps the most telling of all the factors is the integration factor. How integrated is the indvidual’s work with your organization’s mission? Are you a policy organization hiring a policy consultant? A labor organization running a unionizing campaign? Or a technology service provider providing IT support? Or any organization hiring a full-time interim executive director?

Do these examples sound like your organization? It may be time to bring in an employment lawyer or HR consultant.

The Department of Labor (DOL) oversees the Fair Labor Standards Act (FLSA) and has been cracking down recently on misclassifications. The DOL has a slight different standard of determining worker classification, and as an employer, you have to pay attention to both.

In light of the Uber and Lyft cases above, DOL issued in July 2015 an Administrator’s Interpretation on this very topic with great examples (scroll down to page 6 if you’re not into all of the legal stuff.) The DOL uses the economic realities test as the primary tool to determine whether a worker should be classified as an employee or a contractor. The Wage and Hour Division (WHD) has a nice fact sheet outlining six factors examined in the economic realities test:

      (1) The extent to which the work performed is an integral part of the employer’s business.
      (2) Whether the worker’s managerial skills affect his or her opportunity for profit and loss.
      (3) The relative investments in facilities and equipment by the worker and the employer.
      (4) The worker’s skill and initiative.
      (5) The permanency of the worker’s relationship with the employer.
      (6) The nature and degree of control by the employer.

Each worker is examined under this test, not a class of workers. So you may have two workers doing the exact same type of work, but one may be deemed an employee and the other a contractor. How confusing?!

So, if you’re an employer, don’t rely on your own interpretation. Here are a couple of additional resources you can take advantage of:

If you’re an employee, you can also contact the The Wage and Hour Division Contact Us page to make an inquiry or file a complaint on their website.

My advice: If you’re a borderline case, air on the side of caution and use the different employee classifications (temporary, seasonal, part-time) to accommodate your worker, or change the job description.

Related services: Vega Mala Consulting offers employers and employees support in this area, but we do not offer legal advice.

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