Hiring Workers as a Wisconsin Small Business
It’s an exciting time when a small business is growing and needs to hire its first workers. It’s also a time for legal missteps.
Businesses are required by law to correctly classify each worker they hire as either an “employee” (commonly called a W-2 employee) or an “independent contractor” (commonly called a 1099 contractor). Worker classification determines if the employer has legal obligations with respect to unemployment insurance, workers compensation, minimum wage and overtime, and civil rights protections, among other things.
Generally, a worker is presumed to be an employee unless a business can show that the worker is an independent contractor under applicable law. Having a person sign an “independent contractor agreement” is not, by itself, sufficient—a governmental agency still might find that the person was an employee.
The consequences of worker misclassification can be severe, including civil and criminal penalties, fines, and back taxes.
Worker Classification Laws
Multiple federal and state laws govern worker classification, and those laws are enforced by many agencies, including the U.S. Department of Labor, the Internal Revenue Service, and, for Wisconsin businesses, the Wisconsin Department of Workforce Development. Those laws are beyond the scope of this article, but it’s worth noting they generally look at three areas: behavioral control, financial control, and the type of relationship.
1. Behavioral Control
Does the business have the right to direct and control how the worker does the task? If yes, the worker is more likely an employee. Facts that show behavioral control include:
- If the employer directs the time, place, sequence, and/or means of work
- If the employer’s tools or equipment are used
- If the employer assigns specific duties
- If the employer gives specific instructions to the worker
- If the employer trains the worker
2. Financial Control
Does the business have the right to control the business aspects of the worker’s job? If yes, the worker is more likely an employee. Facts that show financial control include:
- If the worker has little investment in facilities or tools used
- If the worker does not make his or her services available to the relevant market
- If the business pays the worker hourly wages
- If the worker does not realize profit or loss from his or her services
3. Type of Relationship
Additional facts can also show that a worker is more likely an employee:
- The worker has not signed a written independent contractor agreement
- The business provides benefits to the worker
- The relationship is ongoing (and not temporary)
- The worker is providing services that are a regular activity of the business.
Steps for Wisconsin Small Businesses
Properly classifying workers can seem daunting to small businesses, especially with so many laws and agencies involved. A “shortcut” is for a business to focus on the strictest law—if the worker is an employee under that law, then the business needs to hire the worker as an employee and not as an independent contractor.
In Wisconsin, the strictest worker classification laws—and those most enforced against employers—are regarding unemployment insurance and worker’s compensation. The Wisconsin Department of Workforce Development’s website has step-by-step guides on worker classification, including for purposes of unemployment and worker’s compensation.
If you have questions about worker classification, please consult with an employment attorney.
