Many small and mid-size organizations use a range of people to meet their goals. Some are employees; others are vendors, independent contractors, freelancers, consultants, temporary, or casual labor.

States and federal government agencies are in significant enforcement efforts to ensure that anyone who is really an employee is actually treated as an employee. States complain that they are losing tax revenues. There are legal concerns about who is covered by various laws, like workers compensation. And there is concern about benefits and financial security. The increase in company efforts to reduce costs plus the use of freelancers and companies like TaskRabbit have aggravated these issues.

So how do you know who is really your employee?

Certainly there are monetary costs to making everyone who does anything for your organization an employee. And there are some people who do work for you who are easily outside the employee relationship. If you use a CPA or legal firm, for example, you know those are not your employees. When you hire someone through a temporary employment agency to do a short-term job, the agency is the employer.

If you hire temporary, seasonal, or casual labor directly, they are usually employees.

But what happens if you have a bookkeeper who comes in on a regular basis for a couple days each week? Does the bookkeeper have multiple clients for her own business? If so, she is not your employee. If not, she is likely to be your employee.

If you use a business which offers services to the public to provide you with services, contract work, or consulting then you are not likely to be the employer — unless your firm is the only client of that business.

When you consider bringing someone in to help out and you or they want it to be on a “1099″ basis instead of an employee (“W-2) basis, it is critical that you understand the differences. Federal and state agencies look at issues of control and of how the work is done. Control includes whether the person works on-site, how much guidance and direction is provided, whether they use your equipment, the employers right to terminate, and so on.

  • The IRS used to have a specific ‘20 questions” test – while today there is more discretion involved, the test is still guidance and can be found starting at page 5 of
  • The most current guidance of the IRS is at

Government contractors often are faced with this issue of people who want to be paid on a 1099 basis but will be working full-time on a specific contract or contracts. Beware! Unless the person can qualify as a sub-contractor, you are at risk.

Many large firms have fallen victim to these laws in recent years and paid high penalties for their errors. Be pro-active. Look carefully at all those who provide work for your organization and assess which category each is properly in. If you are unsure, talk with your employment lawyer or HR consultant and get the proper determinations made.