Employee or Independent Contractor?

Protecting Your Restaurant Against Costly IRS Penalties and Workers’ Compensation Claims

IRS Reporting / ACA Compliance

Complicated and often misunderstood ACA compliance rules mean that many employers do not have a clear understanding of how they may be affected.  This year, the mandate for health coverage expands to reach employers with as few as 50 workers. This means that the Applicable Large Employer (ALE) status carries critical importance. The law defines employers subject to the mandate as organizations that employed an average of at least 50 “full-time employees” on business days during the preceding calendar year. Counting workers is not a simple matter.

Accurate counting requires an employer to also factor all employees of any related companies inside a control group; and to also aggregate other types of employees, specifically part-time and sometimes seasonal workers or independent contractors into the count.

In 2016, health care reform also requires ALEs to report to employees and the IRS whether they offer their full-time employees (and dependents) the opportunity to enroll in coverage under an employer-sponsored plan. It’s important to know that this now includes any independent contractors who may be considered as full-time employees. ALE-subject businesses must carefully track a broad range of information on a monthly basis for each and every employee.

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Employee or Independent Contractor?

Employers who misclassify employees as independent contractors could also be on the hook for federal and state income, Social Security and Medicare taxes, unemployment taxes should the worker be laid off and retroactive workers’ compensation coverage. This type of expense across a fleet of workers could be crippling for an employer of any size.

So, how do you determine if a worker is an employee or an independent contractor? The first step is to explore the relationship that exists between your restaurant/company and the worker.

According to the Internal Revenue Service (IRS), worker classification can be determined by the following three categories[1]:

• Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
• Financial: Are the business aspects of the worker’s job controlled by the payer? This includes how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
• Type of Relationship: Are there written contracts or employee-type benefits, i.e. pension plans, insurance, vacation pay, etc.? Will the relationship continue and is the work performed a key aspect of the operation?

You may have answered yes to some of these questions and no to others. All three categories must be considered in tandem when determining if the worker is an employee or an independent contractor. There is no magic number of factors that determines employee status. Instead, employers must look at all these factors as a whole, considering the degree of the control and independence of the worker.

Employees require workers’ compensation coverage

Beyond IRS reporting, employers are required to carry workers’ compensation coverage for their employees, but not for their independent contractors.

Workers’ compensation (WC) insurance provides medical, disability and rehabilitation expenses for an employee who is injured in the course of their employment. WC coverage is mandatory in the United States for all employees, and employers can be penalized for not having a policy in place.

Know your workers’ status

The IRS estimates that millions of workers nationally are misclassified, and the consequences can be felt at both the state and federal level. State governments are passing more laws to protect employee rights and crack down on employers who aren’t meeting their obligations, while at the federal level increased IRS audits are exposing unlawful employers.

Properly identifying your employees based is vital to remain compliant and avoid penalties. Your insurance broker should be able to help you with this process.

Robert Fiorito serves as Vice President, HUB International Northeast, where he specializes in providing insurance brokerage services to the restaurant industry. As a 20-year veteran and former restaurateur himself, Bob has worked with a wide array of restaurant & food service businesses, ranging from fast-food chains to upscale, “white tablecloth” dining establishments. For more information, please visit www.hubfiorito.com

Robert Fiorito
Robert Fiorito serves as Vice President with HUB International Northeast, a leading global insurance brokerage, where he specializes in providing insurance services to the restaurant industry. As a 25-year veteran and former restaurateur himself, Bob has worked with a wide array of restaurant and food service businesses, ranging from fast-food chains to upscale, “white tablecloth" dining establishments. Robert can be reached at 212-338-2324 or by email at robert.fiorito@hubinternational.com. For more information on HUB, please visit www.hubinternational.com.