I often hear my clients or other Government Contractors use “Subcontractor” and “Independent Consultant” interchangeably; however, they are not synonymous. Sometimes I hear Independent Consultants being referred to as “1099s”, which is a misnomer because 1099s shall be issued to both unless the Subcontractor is an S or C Corporation. An individual may be working for a company as an Independent Consultant but based on the Department of Labor Fair Labor Standards Act (FLSA) guidelines, they may actually be determined to be an Employee. It is vital to differentiate and classify the worker correctly; or it may lead to fines and penalties.
A Subcontractor has a separate business entity set up (e.g. business license, Federal Identification Number aka Tax ID) and may or may not have employees. For the purpose of this article, I am defining an “Independent Consultant” as a person who works for him/herself, uses his/her social security number, and does not have a separate business entity set up. An employee is one who typically performs duties dictated or controlled by others. In most cases, an employee is provided training, tools and/or equipment to do the job. Employees also may receive company benefits and the employer pays a portion of Social Security, Medicare, and state unemployment taxes.
If a company is working with a legitimate Subcontractor, there is little risk. One of the Department of Labor’s goals is to protect worker’s labor rights. By someone being employed by a Subcontractor (i.e. company), he/she is covered by labor laws. For example, within certain parameters depending on the state/jurisdiction, if someone is employed by a Subcontractor and is laid off, he/she is eligible for unemployment benefits.
The dicier issue is whether a person should be classified as an Employee or an Independent Consultant. To a lay person, I realize this may be a case of how the person wants to get paid, but it is actually a much larger issue under the FLSA. The Supreme Court has said there is not a single factor to determine whether a person is an Employee or Independent Consultant. It is whether the person “follows the usual path of an employee”. Here are some of the factors to take into account to determine whether someone is an Independent Consultant or Employee:
- How integral is the worker to the business? For example, does the worker make hiring decisions or supervise employees? These are generally employee responsibilities.
- Does the worker have other customers? Consultants usually have multiple customers.
- Does the individual have his or her own tools? Consultants usually provide their own supplies, materials, and equipment.
- How long will the worker be engaged with the work effort? If it is a long-term, permanent position, the person is often considered an employee.
Proper classification of all three of these types of workers is the key. When classified correctly your business will not expose itself to cumbersome audits and potential fines and penalties.
This is just one aspect of Government contracting that Streamline can help you understand.
This blog is for informational purposes only. None of the content is, or will be deemed to constitute legal opinions or legal advice.