Hiring employee as a contractor

Are there any issues to be concerned with when hiring a salaried employee to perform ‘overtime’ as an hourly contractor? No withholdings from the hourly pay and extra work will be paid as a separate check, not as a part of the employee’s regular paycheck.

FIrst off, this is an odd situation and you need a lawyer badly assuming this is not totally hypothetical. I’m not ever sure if this is legal at all. At a minimum, you could easily be seen as trying to evade overtime rates, which are mandated by law for a reason.

This link does not give any backup details, but does suggest it is not something you want to do.

Can a person be a employee and a independent contractor at the same time

IIRC, there are a couple of things that set IC’s apart from regular employees, and you need to take those into consideration. The two big ones are that IC’s can refuse jobs and they can compete freely. In other words, if you ask an employee to put in some overtime as an IC, he can legitimately refuse to do so, and you won’t be able to fire him from his regular position. Furthermore, he can choose to pick up jobs from other companies in the area. You won’t be able to do much about this either. I can’t speak to whether your idea is even legal in the first place, though I suspect it isn’t. Just keep in mind that there are some serious drawbacks.

I was once on the employee end of such a relationship. AFAICT the employer was not doing things entirely legally. I covered my ass by calling the IRS and IIRC a state (Pennsylvania) agency. I found out that he was not within the law, however my ass was covered and I was entirely legal.

Now that I am on the employer end of things, without a lawyer/accountant assuring me I was safe, I would avoid situations like what you describe.

The IRS will very likely not like this sitrep. Consult a CPA.

Under audit, most government agencies are going to expect that an employee hired as an independent contractor is going to be performing duties outside of their regular job duties as an employee.

For example, let’s say you have a programmer as an employee. If he moonlights on the weekends as a photographer and you hire him to shoot the company picnic as an independent contractor, there’s no problem. But if the employee moonlights as a freelance programmer and you hire him as an independent contractor… well, he’s already an employee doing the same basic work.

An independent contractor needs to be independent. You cannot enforce dress code, methods of work or hours - only the work product and deadlines. The independent contractor should be established in a profession, serving other clients (or at least advertising for them), buying his own equipment, tools and supplies, and providing his own office space.

So… just don’t do it. If an audit determines that you failed to properly classify employees, you will owe taxes to federal and state agencies, plus penalties. You can be found liable for time and a half compensation.

Dumb question maybe but: You said ‘salaried employee’

Up his pay for any work you want him to do for the weeks that he performs said duties.
Do you not want to get stuck with the additional taxes or what?

Asking for a friend, so I don’t have all the details. Involves a private non-profit establishing a new, offsite program and hoping to avoid hiring new staff until the program is off the ground.

Depends who is investigating and why…

The IRS wants to be sure any tax is withheld from any pay. Their definition of employee and pay has probably been adjusted to make sure this scenario does not happen. In Canada, the employer not takes tax off the employee cheque but also pays a portion of unemployment fund and Canadian pension Plan out of their own pocket. not sure what the US rules are, but I bet at the very least, you would be liable if the employee for some reason fails to pay their taxes. Plus… penalties for timing… The same would apply for any state taxation agency.

The local labour standards body (Canadian province or US state) have rules about overtime, and what constitutes an employee; at the very least, your contract rate must be as much as the person would get in overtime wages. Employees cannot sign away these rights - you cannot agree to work for less than minimum wage, and you cannot agree to work overtime for less than time and a half.

Finally, there are a list of criteria that determine whether someone is a contractor or an employee. This depends on the country; for example, in Canada an independent contractot sets their own hours, has a lower level of supervision, no more than 85% of income from one “employer”, etc.

If the judge looks at the situation and says “you treat this person just like a normal employee”, they do the same work as emloyees, then they are an employee. Not sure what the exact criteria are in the USA, but you want serious legal advice. As I said, the tax people want to be sure they get the taxes before April 15th rolls around and the person says “oops, I spent it all”. They have a vested interest in making sure the criteria for contracting is as difficult to meet as possible.

If it’s something completely different - The shipping clerk will do the landscaping and window washing on Saturdays - then you probably have a good case. If it’s the shipping clerk working overtime to fill some bigger orders, you might as well not bother trying to fight the overtime pay.

Well the laws vary in each states so it’s very important to look.

All states have laws which help you test whether an employee is in fact an independent contractor.

I used to work in H/R and in Illinois here’s an overview

The first two checks are:

[ol]
[li]The nature of the work is outside the scope of normal duties or the bulk of the work is performed outside the place of business[/li]
[li]The worker has complete freedom of the direction or performance of the service he is rendering. (Obviously within the scope of the contract. In otherwords he has to live up to the contract)[/li]
[li]The worker must be actively engaged in other similar work activities[/li][/ol]

Now it gets complex from here. Each of those conditons has like 25 subconditions you have to meet as well.

The burden to prove the employee is an independent contractor lies “strictly” with the employer. In other words if the person suddenly claims he is actually an employee YOU have to disprove his claim.

Here’s a couple of examples, from when I was working.

  1. We had an employee Debbie. Debbie was an admin. But she had a side business where she made cookies and cakes. We’d hire her as an independent contractor to bake for meetings. Debbie in this case was an independent contractor. She set her own rates. She worked off premises. Her cookie business was totally unrelated to any duties. And most importantly she was actively engaged in the cookie business and had many other clients. She had her own website and an EIN number.

It wouldn’t be hard to show Debbie, when she was making cookies was an independent contractor.

  1. I was the systems admin for a big hotel. They wanted me to teach other programs that were computer related. I had my own side business and my own website and EIN number etc.

I couldn’t qualify simply because teaching software was also part of my job as the systems admin.

So what did they do. Simple we worked out an agreement where I would work and be paid at two seperate rates. They took my rate $25/hr and made the job pay $16.67/hour. When I taught classes, I punched in with a different card. Of course this was all overtime (at 1.5 x 16.67) so I always came out with $25.00

If you are simply trying to avoid paying an employee overtime, forget it. It won’t work. You may get away with it, if you can intimidate your employee into it, but at least in Illinois it’s a bad idea.

For one, in Illinois, the employee has up to two years to file a grievence, AFTER they leave their job for pay issues. So while you think you can bully a person into working unpaid overtime and get away with it, as soon as he quits, he can file a claim with Illinois Wages & Hours and now you have no power over him, and you’re really screwed. Remembrer it’s two years after he quits. So you could have mispaid him in 2001 and he quit in 2010. He’s got till 2012 to file.

If the person was paid salary, you may find not only did you screw up the extra work but the state Wages and Hours, can say the whole job should’ve been wages and not salary and make you pay his entire work as wages.

OK if you’re found at fault, you owe the employee back wages PLUS interest, PLUS you can be fined up to $10,000 plus other fines the judge may impose. Now this is just the start. The IRS will fine you for failing to report wages correctly. You will get a retroactive fine plus 2% interest from the time you failed to file correctly.

Finally this opens you up to a complete wages and hours audit. Not only do you risk problems from this one employee, they can now go through ALL your employees dating back to that one employee, to see if you did this to anyone else.

I’ve been through a wages and hours audit and it’s not fun.

The best thing to do is forget about trying to save money by making an employee work unpaid overtime.

Simply put an ad in Craigslist for a minimum wage job to work the overtime this guy would be working. Class the job as part time, no benefits, etc.

I’m not sure how if any of the new Health Care legislation applies, if it applies at all yet, so keep that in mind.

Basically hire a temp and save yourself a lot of bother

The classic 20 Questionsfor determining whether someone is an employee or a contractor.

And the IRS version.

I may not have been clear enough, this is not an ‘either or’ scenario for employee/contractor.

Instead it is ‘so and so is a salaried employee, but in addition to 40 hours a week, we want to hire them as a contractor at a flat rate for additional work of the same type’. (not sure about exempt status)

Thanks for all the responses.

Your question was “are there any issues?”

THe answer is yes, you have to make sure the IRS doesn’t think you are only hiring the person as a contractor to avoid taxes.

That is what people are telling you that you should be especially careful of though. What the employer and even the employee may seem as fair could be very different than the state and IRS see things. People try to use that as a tax dodge and they are onto it. Such a thing isn’t always forbidden though. At my last job an an HR Consulting firm no less, they were burning out junior analysts so they offered them half-time pay for hours over 40 hours a week. That isn’t a typo. They literally got half of their normal pay for those long weekend hours and somehow that was legit but they weren’t considered independent contractors either. Of course, for most exempt jobs in the U.S., you can make someone work as much as you want as long as there isn’t a formal contract. Jobs with long hours often give a bonus on top of salary for extra effort so that is another way of dealing with the issue.

Yes, and most of the answers are predicated upon that. You can not just treat anyone as a contractor, especially if they do the same work as an employee. Thus, a employee who does the same work but now as a “contractor” would generally be verboten under IRS rules.

If you like, I can make it very much simpler, even perhaps simplistic; NO!

Can you explain why you want to do this?

Yep that was my question, sorry, I just misunderstood your ‘here is how to determine employee OR contractor’ answer.

I don’t want to do this. A friend posed this as something being proposed (by upper management) for the team she manages. My reaction was exactly like the ones expressed here - risky if not illegal. Thanks to all for the confirmation - we can call this GQ answered.