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Take Our Quiz: Do You Really Understand the Difference Between Employees, Gig Workers, and Independent Contractors?

Take Our Quiz: Do You Really Understand the Difference Between Employees, Gig Workers, and Independent Contractors? 2560 1710 Alicia East

Companies have various options when it comes to hiring talent. While some take the “what’s in a name?” approach and classify based on their own convenience and cost considerations, the classification happens to be of great consequence to the Department of Labor. So let’s compare three common categories of workers (employees, gig workers, and independent contractors) and how to decide which arrangement applies to your workers.

Three Common Types of Workers

1. Employees: These individuals work for a company on a regular basis, usually full-time or part-time. They are typically integrated into the company’s structure and work under the direct supervision and control of the employer.

Key Characteristics:

  • Receive a fixed salary or hourly wage.
  • Eligible for benefits such as health insurance, retirement plans, and paid time off.
  • May have taxes withheld by the employer.
  • Often have a long-term commitment to the company.

When to Engage Employees:

  • When the tasks require consistent, long-term presence.
  • When the work is integral to the core functions of the business.
  • When there’s a need for in-depth training and development.

2. Gig Workers: These workers are usually temporary and perform specific, short-term tasks or projects for a company. They are hired for a specific job or a defined period, and the relationship is often project-based.

Key Characteristics:

  • Paid for completed projects or tasks.
  • Typically not eligible for company benefits.
  • Often manage their own taxes and work schedules.
  • Offer flexibility and adaptability for short-term projects.

When to Engage Gig Workers:

  • When the workload fluctuates and requires temporary assistance.
  • When specialized skills are needed for specific projects.
  • When the company does not need long-term commitments.
  • When there’s a need for rapid scalability.

3. Independent Contractors: Self-employed individuals who provide services to a company but maintain significant control over their work. They are responsible for their own taxes, insurance, and equipment. Independent contractors (also known as freelancers, consultants, or 1099’s) have a different set of expectations than employees.

Key Characteristics:

  • Usually paid based on a contract or fee arrangement.
  • Not eligible for company benefits.
  • Have more control over their work and schedule.
  • Often use their own tools or equipment.
  • They can move regularly from client to client and business to business.
  • They are also responsible for reporting their own business income and paying self-employment taxes.

When to Engage Independent Contractors:

  • When specialized skills or expertise are needed for a specific project.
  • When flexibility is essential.
  • When the work can be outsourced without compromising quality.

Take Our Self Audit

The choice between employees, gig workers, and independent contractors depends on the nature of the work, the duration of the engagement, and the company’s specific needs. It’s essential for businesses to understand these distinctions and carefully evaluate their workforce strategy to ensure they are making the right choice for each situation. It’s a deceptively complex task. It’s important to be able to classify workers accurately. The risk of facing an audit has never been greater. Take our 5-minute worker classification self-audit here (pinky promise it’s easier and faster than any government-backed audit) or contact us with any questions.

What California’s Private Attorneys General Act (PAGA) Means For You

What California’s Private Attorneys General Act (PAGA) Means For You 2560 1707 Alicia East

California’s Private Attorneys General Act (PAGA) is a critical piece of legislation with far-reaching consequences for labor rights and business operations. With PAGA, employees have power to enforce labor laws and directly hold employers accountable for violations. We’ll discuss what this significant piece of legislature means for employees and businesses.

What’s in a Name?

The Private Attorneys General Act grants employees the right to “recover civil penalties on behalf of themselves, other employees, and the State of California.” The name itself holds a big key to understanding the act because the law effectively deputizes private individuals to act as “private attorneys general” and gives them the authority to pursue civil penalties. Under PAGA, employees can make claims regarding a wide range of labor issues, including wage and hour violations, inadequate break periods, and workplace safety concerns.

What is The Argument in Favor of PAGA?

Like any legislation, PAGA has detractors, but proponents say it has the following benefits:

  1. Increased Employer Accountability: The idea is that by giving employees power to hold employers accountable for violations that might otherwise go unnoticed, employers are held to a higher level of accountability to maintain positive workplace conditions.
  2. Deterrence of Violations: PAGA intends to serve as a deterrent against employers taking advantage of employees as the threat of substantial financial penalties and long legal battles encourages companies to comply with labor laws.
  3. Empowerment of Employees: PAGA purportedly empowers individual employees to take an active role in safeguarding their own rights. It democratizes the process of upholding labor standards by enabling individuals to seek justice without relying solely on government agencies.

How Does PAGA Affect Businesses?

Detractors says the Private Attorneys General Act presents significant challenges and drawbacks for businesses and makes it prohibitive to operate there. They also say it increases the potential for frivolous lawsuits, and a cascading list of damages.

  1. Makes Operating in California Harder: The constant threat of PAGA claims has the potential to increase financial strain. Penalties for violations can be substantial and even if businesses ultimately prevail in PAGA lawsuits, the processes can tie up internal resources and lead to collateral damage. Negative media coverage and public perception can impact a company’s brand image and customer trust. This can have long-lasting effects on customer loyalty, shareholder confidence, and overall business success.
  2. Incentivizes Frivolous Lawsuits: While most companies have internal procedures to address grievances, PAGA empowers employees to file lawsuits for relatively minor violations that might’ve been handled internally instead. Opportunistic individuals may bring forward frivolous lawsuits and exploit the system for personal gain rather than use the system to address genuine labor law violations. Such lawsuits waste valuable time and resources and also undermine the credibility of legitimate claims, therefore diluting the effectiveness of PAGA.

How Can Businesses Protect Themselves?

Understanding the implications of PAGA and taking proactive measures to protect themselves against potential claims is essential to the health of a business. Here are some strategies companies can adopt to safeguard their interests while ensuring compliance with labor regulations.

  1. Comprehensive Compliance Practices: The foundation of protection against PAGA claims lies in ensuring that your business is fully compliant with labor laws and regulations. Establish comprehensive compliance practices that include regular audits of your HR policies, wage and hour practices, employee classification, and other pertinent areas. By identifying and correcting potential violations early, you can mitigate the risk of PAGA claims arising from inadvertent errors.
  2. Transparent Documentation: Maintain thorough and accurate records of all employment-related activities, including payroll, working hours, breaks, and employee classifications. Transparent documentation not only demonstrates your commitment to fair practices but also serves as invaluable evidence in case a PAGA claim arises. Consistently documenting policies, training sessions, and communication with employees can help establish your company’s efforts to comply with labor laws.
  3. Effective Employee Communication: Clear and open communication with your employees is key to preventing PAGA claims. Ensure that your employees are well-informed about their rights, responsibilities, and grievance procedures. Create a culture that encourages employees to raise concerns internally before resorting to legal actions. Having a well-defined internal process for addressing grievances can help resolve issues before they escalate into legal disputes.
  4. Regular Training and Education: Invest in training programs that educate both management and employees about labor laws and workplace policies. Regular training sessions can help prevent unintentional violations and foster a proactive approach to compliance. By demonstrating your commitment to keeping all stakeholders informed, you create a stronger defense against PAGA claims.
  5. Engage a Compliance Partner: Given the complex nature of labor laws and the nuances of PAGA, seeking support from experts is wise. They can provide insights into potential vulnerabilities and help you implement strategies to mitigate risks. If handling all of these details is beyond your interest or bandwidth, you can engage an Employer of Record that is in position to do all of the above and indemnify you of many of the risks associated with engaging employees in California. Contact us to discuss your potential vulnerabilities as well as how you can protect yourself.

The Bottom Line

The Private Attorneys General Act (PAGA) has reshaped the landscape of employee rights and employer responsibilities in California. While it does present potential challenges for businesses, adopting a proactive and comprehensive approach and engaging the right partners can significantly reduce the risk of PAGA claims.


Here’s What to Think About if You’re Expanding Your Business (And Therefore, Your Payroll)

Here’s What to Think About if You’re Expanding Your Business (And Therefore, Your Payroll) 2560 1707 Alicia East

If you’re planning to expand your business, one of your top priorities should be making sure you’re in position to classify and pay employees and independent contractors properly. This is especially important if you’re looking to hire people in any state without any red tape. Today, we’ll talk about what it takes to run payroll and when it’s helpful to engage a partner.

Doing Payroll Right

Since payroll is always a complex, high-stakes business, it’s worth investing anything required on the front end to make sure you do it right. Whether you train an in-house team or engage a partner, they need to be in position to classify correctly, stay on top of laws as they change, identify and respond to the different tax requirements, and have a system in place that allows the process to be simple, accurate, and fast. This helps you avoid future fines and legal battles.

Doing it right means doing the following:

  1. Learning local employment laws. This includes identifying regulations regarding working hours, holidays, sick pay, insurance, and more and having a (preferably automated) system in place to follow those rules.
  2. Onboarding workers. This includes collecting information such as name and date of birth as well as tax forms, background checks, benefit status, and work eligibility.
  3. Storing and securing data. Since you’re dealing people’s personally identifiable information (PII), you MUST have a way to secure that highly-sensitive data. The fines for mishandling data are serious, so you should be equally serious.
  4. Authorizing payments and ensuring your employees get paid accurately.  This includes identifying the appropriate deductions/taxes, keeping accurate records, paying on time in every location, sending out notifications, reporting as required to government institutions, etc.
  5. Having a system in place to identify and adjust to changes. You don’t always have time to wait weeks to adjust to new laws. Things evolve rapidly, so your system needs to be ready to evolve just as rapidly.
  6. Staying compliant. Laws are different from place to place and do change frequently, so your payroll management software solution should have systems in place to ensure  compliance wherever you operate.

Would Outsourcing Payroll Benefit Your Business?

Outsourcing payroll is especially valuable in certain situations. If a company needs to hire employees in multiple states, is growing rapidly, and/or needs to hire temporary workers frequently, engaging an Employer of Record (EOR) could be a game changer. An EOR mitigates compliance risks, increases payroll efficiency, and eases the administrative burdens of managing a workforce.

The Bottom Line

Payroll is one of the most complex and challenging aspects of operating a business and should be given appropriate attention by every business. When a company is growing, payroll is one of the most important aspects of business to have in good working order. The right people on your in-house team or the right partner are essential. If you think a partner would be beneficial to your business, reach out! Relax: We got it.

The DOL Has Its 👀on YOU: Let’s Talk About Audit Prevention

The DOL Has Its 👀on YOU: Let’s Talk About Audit Prevention 150 150 Alicia East

If you employ any number of independent contractors, the Department of Labor (DOL) has an interest in your business. Yes, yours. You should take it as seriously as they do.

Hiring such workers is attractive to companies looking for outside creative resources as well as those that have varying, seasonal, or event-based needs. It can help keep overhead low and is a great way to outsource work that is not central to their main line of business. It can also be a great way to find top talent on a specific, project-oriented basis.

Sounds nice, right? But there’s a big catch.

The legal definition of an independent contractor is constantly being redefined through legal means. While it can vary from state to state, it is trending toward a narrower definition across the board. These guidelines are meant to prevent firms from misclassifying would-be employees, thereby avoiding a bounty of state and federal taxes.

Is your IC really an independent contractor?

It is a deceptively complex question. It’s important to confidently be able to answer “yes”, because the risk of facing an IRS audit has never been greater. Take our 5-minute worker classification self-audit here (pinky promise it’s easier and faster than any government-backed audit).

As self-employed workers, independent contractors (also known as freelancers, consultants, or 1099’s) have a different set of expectations than employees. Businesses engage them to do a specific job for an agreed-upon rate. Unlike a regular employee, they can move regularly from client to client and business to business. They are legally entitled to fewer company benefits. They are also responsible for reporting their own business income and paying self-employment taxes.

Best Practices When Engaging Independent Contractors:

  • Engage contractors with an established business entity, name, and EIN
  • Engage contractors who have multiple clients
  • Have every IC provide a certificate of insurance, including general liability and worker’s comp insurance
  • Have a signed project agreement specifying project length, compensation and liability
  • Avoid training the worker, directing their work responsibilities, providing equipment, or defining their work schedules

Prevent an Audit With Airtight Contractor Payroll Processes

Audits are costly and time-consuming even for businesses that do everything by the book. How much are you willing to pay in time and hassle for employee misclassification? Engaging the right payroll partner mitigates most of the risks associated with engaging independent contractors. At PayReel, we assess each employment situation individually to make sure you are in complete compliance. Do you have questions about independent contractor status? You can trust PayReel to help you make the determination.

Direct Sourcing: How to Walk The Compliance Tight Rope

Direct Sourcing: How to Walk The Compliance Tight Rope 2560 1707 Alicia East

Direct sourcing allows businesses to place workers as needed and on a temporary basis. One of the biggest benefits is that they get to keep the best workers in the pipeline between projects and tap their pool of talent as needs arise. Direct sourcing is a great tool for managing a contingent workforce, but companies must remain vigilant to stay compliant.

Direct Sourcing And Risk & Compliance 

While direct sourcing is an incredible asset to companies, it’s important to keep risk, compliance, and payroll top of mind. Mitigating risk requires specialized skills, a great depth of knowledge, and a department with enough bandwidth to understand and follow rules on a state and federal level.

Errors can be incredibly costly. Companies can be subject to heavy fines when they classify workers incorrectly or make mistakes with payroll. In addition, companies can face damage to their reputation and end up directing resources (including time) that could otherwise be directed elsewhere. Worker classification and payroll rules vary from state to state and on a federal level as well.

Since regulations change all the time, hiring organizations must do due diligence to make sure they keep their practices compliant and their businesses in good standing. Any company using direct sourcing simply must also include effective worker classification and payrolling services as a part of its plan.

When is it Time to Engage a Partner?

For companies that use direct sourcing, engaging a partner for risk compliance, worker classification, and payroll can be an incredibly sound business move. A partner can fill in the gaps to fill payroll demands and other contingent workforce management. Companies without a specific department to fill these roles will be well served by engaging a partner with the bandwidth and skills to handle everything related to risk, compliance, worker classification, and payroll for a contingent workforce.

The best partner will be able to handle every type of worker a business employs. When direct sourcing talent, many businesses find an Employer of Record (EOR) that takes care of all the administrative details of managing a contingent workforce is an indispensable part of their team.

If you’re considering whether an EOR would be helpful to your business, let us know! This is our jam.  

Pop Quiz: Is Your Industry The Latest to Make Misclassification News?

Pop Quiz: Is Your Industry The Latest to Make Misclassification News? 2560 1707 Alicia East

Accurate worker classification is important in every industry and for every company–large or small. That said, any business that relies on a contingent workforce is especially vulnerable. The Biden administration’s decision to rescind the Worker Classification Rule made it easier for workers to argue for minimum wage and overtime protections/compensation. We’ve all seen headlines for the big companies, but companies without recognizable names are facing the same challenges. Smaller companies may try to take the “blissful ignorance” route and face costly consequences later. Ride share companies frequently make headlines, but lately, we’ve seen multiple companies in the healthcare industry end up in hot water.  

Why is it so Easy to Make Mistakes?

The gray area between W-2 employees and independent contractors is getting increased attention from the Department of Labor. Every time a new piece of legislation passes in this area, it seems to make the distinction between workers less clear. But one aspect of the trend is clear: It’s getting harder and harder to accurately and safely classify workers as independent contractors. With the big headlines, you’ll find big fines. They’ve cost Uber over $100 million in settlements, with some cases still pending. Still, while it may be tempting to think of this as a big company problem, it’s not true.

Between increasingly-savvy workers and a Democratic-led administration, smaller companies are vulnerable to big problems, too. For example, this at-home healthcare services provider was recently found responsible for over $358K in back wages and this therapy firm’s $9 million bill packed a big punch.

The Bottom Line

It just isn’t worth it to try to avoid the rules or get away with not knowing them. Ignorance doesn’t hold up in a court of law. Paying close attention to accuracy pays dividends. At PayReel, compliance comes first. We classify your employees properly, and we also pay them properly so that you can hire who you want exactly when you want them. If gray areas aren’t your thing and the term “lawsuit” makes your heart skip a beat—relax, we got it. Contact us around the clock at 303-526-4900 or email us here.

Do You Engage Independent Contractors in California? Be Afraid. Be Very Afraid.

Do You Engage Independent Contractors in California? Be Afraid. Be Very Afraid. 2560 1707 Alicia East

It truly is a tightrope walk doing business in California, especially if you engage independent contractors. Still, you don’t panic. Let’s talk about what makes California high risk (hint: worker classification tops the list), what’s at stake, and how businesses can protect themselves. 

Why is California Considered High Risk? 

California is considered the riskiest of the risky states for doing business. The Golden State is often the first to legislate an issue surrounding employment and other states often follow suit with similar laws. Whether you do business in the state or not, what happens there will affect you in one way or another. 

In addition to California’s worker classification rules (which are some of the most stringent in the country and where our focus will be today), California requires employers to walk a narrow path when it comes to sexual harassment training, privacy protections, meal wages, and more. 

Worker Classification

This is where California’s rules affect employers the most because it’s where it’s hardest for companies to classify workers as independent contractors. California’s approach to worker classification (among other topics) purportedly intend to protect workers and provide “the labor law protections to which they are entitled.” In addition to the federal legislation, states have free reign to make some of their own rules. True to form, California has some of the strictest requirements surrounding worker classification and it’s important for companies to pay attention because violators can expect to be subject to strict penalties such as fines, possible jail time, and damage to their reputations. 

What Makes Worker Classification Extra Tricky in California?

When California replaced the long-standing Borello test with the ABC test, it eliminated some of the gray area in deciding whether a worker is an employee or not. Workers can only be considered an independent contractor if all of the following apply:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

(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 the work performed.

This is the narrowest definition of an independent contractor to date and puts more pressure on point “B” than ever before.

What’s at Stake For The Government?

Whenever a government agency legislates an issue, it’s reasonable to ask what the stakes are and how much attention they’ll give it. In this case, there is a ton of money on the line. To date, determining the differences and properly classifying workers have been highly complicated tasks, depending on factors such as the ability to hire or fire a worker, the kind of occupation, the method of payment, location and more. According to the court’s ruling in the Dynamex case, “the misclassification of workers as independent contractors rather than employees is a very serious problem, depriving federal and state governments of billions of dollars in tax revenue.”

The government’s concerns center around the fact that:

  • Independent contractors write off business expenses and may underreport income
  • Small businesses can avoid certain taxes with fewer W2 employees
  • ICs are more difficult to track and tax accurately than W2 employees

What Does it Mean For Business?

Some employers like this way of structuring worker classification because in theory, it gives workers more ownership in the company’s success. Others say it makes their business model unsustainable.

It’s point “B” of the ABC test that can be most challenging to the way many businesses operate. It states that a worker must perform “work that is outside the usual course of the hiring entity’s business” to be classified as an independent contractor. 

Some companies have restructured operations completely to avoid hiring more W2 employees (new laws have a way of precipitating new ways to get around said laws). Another way to avoid reclassifying is simply to operate business as usual and wait to be challenged. Smaller companies have been known to get away with this approach indefinitely.

What About The Workers?

Still, some independent contractors have been unhappy with the changes and expressed concern for their livelihood. Even if all the perks afforded an employee (healthcare, time off, etc.) bring them close to their original pay in practice, their paycheck may look a lot smaller on the surface. Many industries have been granted exemptions from the ruling, indicating that, as always, there is no simple cut and dry answer to an issue this complicated. 

Independent contractors set their own schedule and manage their own businesses. While independent contractors are still responsible for paying taxes, they can also take advantage of many write-offs. Along with the perks, they do have the responsibilities that come with owning their own business. They run their own books, pay quarterly taxes, advertise, purchase their own equipment, and deal with the seasonal nature of the biz. Independent contractors also don’t get paid time off and are responsible for purchasing their own health insurance.

Some workers prefer the stability and possibility for advancement that come with having a greater presence at the office and familiarity with the ins and outs of the company.

How Can Companies Mitigate Risk?

Unless a company is made up 100% of full-time employees, this subject is relevant. Mistakes could result in fines, back taxes, and even jail time. The first step is to stay well on top of worker classification rules. There are exemptions to the ABC test and they continue to evolve. Independent contractors fall outside the wage order’s protections so even some “employees” could still potentially qualify as independent contractors for all other purposes. Stay on top of classification news and how these changes play out in practice will continue to shake out in the courts and in the market going forward. Stay ahead of the game to see how these changes affect your business. California is embarking on the real-time evolution of the economy.

What Are The Stakes for Mistakes? 

Big companies like Uber make headlines for their missteps and pay equally big fines for their worker classification choices. Still, it can be a costly mistake to think it’s only the big companies that face consequences. By rescinding the Trump Administration’s “Worker Classification Rule,” the Biden administration made it easier for workers to argue for minimum wage and overtime protections/compensation. In addition to having to pay back 100% of the matching FICA taxes they would have paid had they classified the worker correctly up front, employers can end up subject to additional penalties such as the following:

  • $50 fine for each W-2 form they failed to file
  • A penalty equal to 1.5% of the employee’s wages 
  • $5,000 penalty for the first misclassified employee and up to $25,000 for each subsequent violation

Suffice to say, misclassifying workers does not save money in the long run. Perhaps scarier than the possibility of monetary damages, misclassification has landed some business leaders under house arrest

In addition, class-action lawsuits, failed audits, and negative headlines can damage a company’s reputation to the point where both workers and consumers are hesitant to engage with the company. It’s just not worth it!     

Bottom Line 

The most common mistakes when engaging contractors in California are misclassifying workers, (of course!), being lax about training requirements or privacy, and meal wage/overtime errors. 

As the economic landscape shifts and independent contractors rise in prevalence, the financial stakes and potential for missed revenue rise, too. In response, government agencies have been ramping up their focus on the subject. The IRS and DOL are not alone. States are joining the fray, attempting to crack down on misclassification while tightening the reins on training requirements, and payroll guidelines.

Where the money goes, lawyers follow. There’s big money in class action lawsuits and new cases are always being filed. While fear is never productive, you should be very, very conscientious when engaging independent contractors in California. Companies must be very vigilant to protect your business, stay compliant, and reduce the risk for fines and unpleasant attention from the IRS.

When is Engaging a Partner a Good Idea?

Examine your options: Working with an Employer of Record (EOR) or Professional Employer Organization (PEO) is standard best practice in this evolving freelancer economy. While both provide payroll and insurance services, the differentiating factor is that an EOR relieves employers of much of the regulatory risk involved in working with independent contractors while a PEO operates as a co-employer and does not assume the employment risk.

If you don’t have the in-house team to do it yourself, it’s worth considering working with a partner. The bottom line is that doing business in California is complicated and the consequences of errors can be immense. While the onus is on employers to classify workers correctly and stay in line with the state’s changing requirements, it’s possible to navigate a rocky landscape with relative ease.

In our world, accurate worker classification and top-notch risk management when it comes to overtime, meal wage, and other laws are always the priority. We are the first to be aware when change is in the air. We track rules in every state as well as on a federal level and offer services to help clients stay compliant. 

If you think a partner would help your business, contact us now. 

Three Business Principles to Avoid Compliance Woes

Three Business Principles to Avoid Compliance Woes 2560 1920 Alicia East

There are many perks of hiring independent contractors, including being able to:

  • Outsource tasks not core to your business
  • Engage workers for specific, short-term, or highly specialized tasks
  • End engagement whenever it makes sense
  • Avoid much of the onboarding hassle
  • Avoid paying a premium for benefits

Engaging independent contractors is very appealing, but is only to a company’s advantage when they stay in accordance with IRS guidelines. Otherwise, they could find themselves in very hot, very expensive water.

Three Business Principles to Stay Out of Trouble When Engaging Independent Contractors

Do Your Due Diligence Up Front

Doing the right things up front will save you headaches later. It’s that whole ounce of prevention thing. One of the most important things you can do to stay on solid ground is to classify workers correctly. It’s one of the very best ways to avoid unwanted interactions with the IRS. A worker’s classification is the foundation for what benefits they’re entitled to by law. There’s a misconception out there that the IRS is only paying to the big companies—the Ubers and Instacarts of the world. This isn’t true and it’s quite a risk to operate like it is. Expensive legal disputes over worker classification have affected companies whose names you’ve never heard of right alongside the Fortune 500 companies that make the headlines. Following the rules and classifying correctly from the beginning saves time in the long run and puts companies on solid ground if the IRS does come knocking.

Make Adjustments When Needed

Classification rules are always changing, right along with the employment landscape. Businesses cannot set something up and then forget about it. We cannot predict exactly how things will change, but we can be sure that they will. A new system could include portable benefits that travel with workers from company to company or something we’ve not heard anything about yet. Whatever happens, businesses that stay in tune with legal considerations are in position to adapt as those changes come. When a company doesn’t have the internal staff or bandwidth to accomplish this, engaging a third party to handle the details is a very sound business decision.

Have a Mutual Understanding—In Writing—With Every Independent Contractor

An independent contractor arrangement can be good for workers and companies alike. Many workers prefer the setup and, with lower costs to employers, it can be a win-win. Still, since workers have to make their own arrangements for retirement, health insurance, and worker’s compensation, which can be a burden. The main way to prevent issues surrounding this is for both parties to understand expectations up front. Whether they’re working for you for a one-time assignment or have a monthly agreement, having a contract with each independent contractor is important. It’s not just good for businesses. Having clear expectations up front is good for workers, too.

The Bottom Line

Currently, there is no standard playbook that guides businesses exactly how to pay contractors fairly while keeping costs down. To navigate it all legally and ethically, you must have the internal resources or the right partner that does. PayReel keeps up with the rules and developments and makes the adjustments on clients’ behalf. This handy guide helps determine whether having a third party handle these details is a good idea for your business. In addition to handling worker classification, PayReel handles other risky aspects of business, including payroll and payroll taxes. Going above and beyond by classifying workers correctly from the beginning, being in position to adapt to changes, and having a clear understanding of expectations is more than warm a warm and fuzzy notion. It’s a sound business decision, too.

What to Know Before Engaging Independent Contractors in High Risk States

What to Know Before Engaging Independent Contractors in High Risk States 2560 1697 Alicia East

Hiring independent contractors can be a great way to advance your business goals without hiring additional employees for the long term. Often, contractors are the best bet for accomplishing specific, creative tasks like rebuilding a website. However, if you engage independent contractors in any of the high-risk states, it’s important to take extra care to protect your business from the associated liability. 

Which States Are Considered High Risk And Why?

Laws around documentation and classification are complicated and in certain states, it’s even more so. There are federal rules around engaging independent contractors and each state has its own regulations as well. What’s more, the rules change often and, in some cases, they even contradict each other. Even so, it’s still possible to guard against the major concerns that accompany engaging workers in these states. 

Some companies dedicate entire departments to the task, but those without an internal team/human resources department that is equipped to address those needs should partner with a company that specializes in handling them. The best partners will be aware of these risks and on top of the changes as they happen. 

The following states are considered high-risk for engaging independent contractors:

  • California
  • Washington
  • Oregon
  • Indiana
  • Illinois
  • Wisconsin
  • Maryland
  • Pennsylvania
  • New York
  • New Jersey
  • Massachusetts
  • Connecticut

What Risks Will Employers Encounter?


While we tend to hear only about the major lawsuits against the big players (like Instacart), many companies misclassify workers without even realizing it. Moreover, a standard, objective test to determine whether a worker should be classified as an independent contractor or an employee doesn’t exist. That’s in part because each state has the power to determine some of its own rules.  

As we know, claiming ignorance is not an adequate defense strategy. Misclassifying workers can lead to fines, liability for unpaid wages and overtime, liquidated damages equal to the amount owed in unpaid wages, treble damages, attorney’s fees, tax and benefits liabilities, and more.


Even if you come out on the other side of an audit clean, it will be incredibly inconvenient and will divert resources and attention away from your business. Employers can quickly get themselves on the government’s radar by misclassifying workers. Having airtight processes–from the up-front paperwork all the way through payroll–is a good way to ensure workers are correctly classified and that they receive the corresponding benefits and accurate pay. 

Additional Training Requirements

In some states, workers are required to have additional training, which can be part of what contributes to their status as high-risk states. For example, California, Connecticut, Delaware, Illinois, and Maine all require Sexual Harassment Training at various intervals and job levels. While these are among the states that require such training, other federal regulations and court decisions make it clear that best practice is for all employers to provide anti-harassment training. Legal decisions at the federal level have demonstrated that failing to provide harassment prevention training makes companies extra vulnerable when issues come up. Precedent shows that employers without training may lose their ability to raise an affirmative defense in a harassment lawsuit. 

Would Engaging a Partner Benefit Your Business?

Engaging a partner whose core business addresses compliance concerns related to engaging workers in high-risk states has many advantages. If you think your company would benefit from having access to workers who are outside of your nexus, eliminating headcount changes, and mitigating risks, it’s time to consider engaging a partner like PayReel. Our system has defined processes for worker classification, payroll, and more. The system takes into account federal, state, and agency rules and includes a checks and balances process to ensure a solid precedent. Bottom line: We take compliance seriously! Contact us to talk about how this might benefit your business. 

Hiring: Employees Versus Independent Contractors

Hiring: Employees Versus Independent Contractors 2560 1707 Alicia East

If you’re looking to bring on some independent contractors or employees to help you accomplish your goals for 2023, you better have worker classification on the mind. How you classify workers affects what paperwork they’ll need as well as how you’ll pay them, what benefits they’ll be entitled to and how/when they execute their responsibilities. The IRS is paying close attention to how employers classify workers and it’s worth thinking about up front to prevent issues later.

What’s The Difference Between an Employee And an Independent Contractor?

Much of the difference between the two comes down to control. While the employer determines what they want done, independent contractors control how and when they accomplish the tasks. They have a lot of flexibility and they are usually not entitled to company benefits. Since they are often hired on a project basis, it usually requires less up-front training to bring them up to speed. Independent contractors are appropriately named because their working arrangements and goals are stipulated in a mutually-agreed upon contract. Contractors pay for their own self-employment taxes, payroll taxes, and benefits.

Employees, on the other hand, are subject to the employer’s stipulations for when and how a worker accomplishes their tasks. Employees usually take more time to train and bring up to speed and also cost more overall because they are entitled to benefits such as 401Ks, health insurance, overtime, and more. Beyond federal requirements, you may be required to offer additional benefits like dental and vision insurance, paid time off, disability, and more. Aside from the costs of payroll, the actual process requires an investment, too. At a minimum, you need payroll software and sometimes it requires a whole department to manage the logistics of such a complicated process.

Employees tend to have a large up front learning curve, but it flattens out because they don’t need to be retrained for the same ongoing tasks. You may also end up paying for recruiting and professional development costs for internal staff.

When Should I Hire an Employee Versus an Independent Contractor?

While it may look like an employee always costs a company more, it isn’t always true. Contractors often charge a premium rate since they are paying for their own benefits and the very best ones can justify top dollar for their services. Still, costs are only one part of the equation. When you’re considering whether to hire an independent contractor versus a full-time employee, you should consider what kind of work you want done.

Independent contractors are great for short-term projects, specialized creative tasks, seasonal needs, and work that is beyond your core business. Independent contractors are great for things like building a new website, designing marketing materials, and handling administrative tasks.

Employees are best when the company needs to be able to stipulate when, where, and how the work gets done or when the work is long-term and ongoing. If the work is central to your core business, think twice before you classify workers as independent contractors. The companies that end up in the news are often the ones that call the workers at the core of their business contractors. Think Uber and Instacart–which have fought to maintain that their drivers are contractors even though their work is central to their business.

The Bottom Line

Which type of worker makes sense—both for your business in general, and for each individual role you need filled—depends on many factors. No matter who you bring on, one of the most important things you can do to protect yourself is classify them correctly. If you are trying to determine how to classify your workers, this 5-minute self audit may help. You may also wish to have a conversation with one of our experts if you need more support.