热点黑料

热点黑料 agencies across the country hire some or all producers as independent contractors instead of as employees. The mixed use of employees and independent contractors in insurance is common in other industries as well.

The ramification of this hiring decision not only affects the business and the person hired, but it also has tax and regulatory consequences. Incorrect classification of an employee as an independent contractor can result in costly tax and legal consequences to the business.

Businesses consider hiring independent contractors for several reasons. There is a reduced cost in expenses, such as payroll taxes, health insurance and other benefits, workers’ compensation insurance, and other overhead, especially if the producer works out of his or her home.

The independent contractor producer typically enjoys a higher level of gross pay since they pay their own business expenses, health insurance and payroll taxes. Independent contractor producers are often paid 10-to-20 percentage points higher than an employee producer to cover those expenses.

The flexibility that comes with independent contractor status is also an attractive feature. Independent contractor producers usually own their book of business, which is much less common for employed producers.

Who is an Independent Contractor?

Employers have historically relied on the IRS criteria to determine if a producer can be hired as an independent contractor or employee. The 20-point IRS checklist looks at factors such as: Does the person have to pay business or travel expenses? Can the business fire them or is there a contract? Does the business set work hours? Does the person work for more than one firm? Keep in mind that these questions act as a guide only. The importance of each factor is ultimately based on the individual circumstance.

Issues involving the classification of independent contractor producers typically do not come up as a stand-alone issue. Questions can arise in conjunction with other problems such as a tax audit, or if a person is injured on the job. Some independent contractors might raise the question themselves as part of a dispute that they might have with the agency.

States are now acting on this question as well. Recent state Supreme Court rulings in New Jersey and California have really limited the definition of an independent contractor. Massachusetts and Illinois have also cracked down on its use. The states are trying to shore up their unemployment insurance coffers.

Big labor is also pushing for the limitation of independent contractors to boost their ranks. These moves might be a reaction to the boom in the gig economy, which thrives on independent contractors.

The recent 2018 California Supreme Court ruling in the Dynamex case created what is called an ABC test. Under the ABC test, workers are presumed to be employees and hiring businesses can designate a worker as independent contractors only if it can show all of the following:

A) “that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work; and

B) “that the worker performs work that is outside the usual course of the hiring entity’s business; and

C) “that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

Now is the time for agencies to revisit the status of independent contractor relationships.

If the hiring business fails to prove any one of the three elements, the workers are deemed to be employees entitled to wage laws and reimbursement for business expenses. The business will also then need to pay for payroll taxes, unemployment insurance, workers’ comp, etc.

Right now, the court ruling in California is specifically for the trucking industry. However, it could soon bleed over to other industries, such as ride share services (e.g., Uber and Lyft), beauty salons, real estate and insurance agencies. Many other states are looking at adopting similar rules as well.

What to Do?

Now is the time for agencies to revisit the status of independent contractor relationships. It is imperative that agency owners understand the current rules and regulations for an independent contractor relationship. Aside from federal law, rules will also vary from state to state and are subject to periodic changes. Because of the complexity of the law, it is wise to utilize an employment professional as a guide through the decision process.

Even if both the business and the individual desire the relationship to be that of independent contractor, and have a written agreement stating the relationship, it still may not matter. The actual circumstances in the relationship determine the status. Regardless if a misclassification is intentional, financial penalties and other costs can create a burden on the business.

Upon a closer examination of the situation, if the agency needs to revise the status of an employee, it still might not negatively impact the bottom line. The producer compensation can be adjusted to account for payroll taxes, insurance and other expenses. Not to mention it could help avoid potential future penalties and costs associated with a ruling against the agency for misclassification.

The convenience of hiring producers as independent contractors can be attractive to the business and the producer. However, incorrect use of that relationship can have dire consequences on the business. Choose wisely.

Topics California Legislation Talent Contractors