Common law employment can be a tricky concept for small business owners. You may be asking, Am I a common law employer? or, What is a common law employee?
Find out the definition of common law employment, how to know if you are a common law employer, and common law employer responsibilities below.
Common law employment
Your workers can be considered common law employees or contractors. Common law employment is the legal term for a “traditional” employee status. The employer dictates the work the employee is required to do and how the work is done.
As a small business owner, it’s your responsibility to know what is considered common law employment and the rules to follow when determining if a worker is a common law employee or contractor.
Independent contractor vs. common law employee
Classifying an independent contractor vs. employee can be complicated. It usually has to do with how the business and worker see one another. There is typically a fine line when determining a common law employee vs. contractor.
Typically, the business or individual will issue a common law contract of employment, employment agreement, or document outlining the relationship. Both parties must sign this document to record the type of relationship.
Common law employees typically have the following criteria:
- Work for a single employer
- Use tools and resources that employer provides
- Receive instructions from employer
- Receive Form W-2
- Eligible for overtime hours based on classification (e.g., exempt vs. nonexempt employees)
You can usually classify contractors by the following criteria:
- Work for multiple employers
- Provide own tools
- Decide how to do jobs
- Receive IRS Form 1099
- Can increase earnings with additional jobs
Criteria may vary depending on your business type and employees. Consider using common law tests for employment status to help clarify a worker’s classification. You can also visit the IRS website for specific common law employee criteria.
Common law rules
Your business must weigh certain factors before determining if a worker is a common law employee or contractor. Be sure to consider all of the following points when classifying a worker.
Type of relationship
Do you offer employee benefits (e.g., vacation pay or health insurance) or have written employee contracts? If so, you will likely consider the worker as a common law employee.
What is the behavior of your business toward the individual? The worker might be an employee if you have control over how the worker does their job.
However, if you assign tasks to a worker and have little to no impact on the task, the worker is more likely a contractor.
Is there a financial dependency between the individual and your business? If your business provides a worker with supplies, tools, or workspace, the worker is likely considered a common law employee.
On the other hand, if your business only pays for invoiced time or work, the worker may be a contractor.
The IRS can impose heavy penalties if a business labels a common law employee as a contractor. In most cases, the incorrect label is done in error by the employer. However, in some cases, employers will attempt to mislabel an employee to avoid employment expenses.
Luckily, the IRS has an option for businesses to help determine how to classify employees. You can submit Form SS-8 to the IRS if you are unsure about an employee’s status. Form SS-8 can be filed with the IRS by the employer or the worker.
Some states may have stricter laws for employers about deciding if a worker is a common law employee or contractor. For example, California requires an ABC test for employers to help determine if employees are contractors.
With the California ABC test, employees need to meet three requirements in order for you to classify them as contractors. Check with your state for specific employee classification laws.
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This article was updated from its original publication date of 3/11/2015.
This is not intended as legal advice; for more information, please click here.