Did I hire an employee or an independent contractor?

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Question:

I run my own Internet business from my home. I hired a friend to answer email on her computer, from her home, and paid her a flat fee of $100 for each week in which she did some work for me -- a total of $2,300. She applied for unemployment insurance recently and listed me as one of her employers. My state's labor department now wants big money from me, claiming she was my employee. How do I convince them that I don't owe anything?

Answer:

As you've learned the hard way, states have become very aggressive in auditing companies to figure out whether their independent contractors should have been classified as employees for purposes of unemployment compensation.

And there's a very good reason for this: money. Unemployment compensation is funded by employer contributions, based in part on how much the employer pays out in wages to its employees. To simplify the math, the more employees are on your payroll, the more you'll have to pay into the fund. Because independent contractors aren't entitled to unemployment compensation, companies don't have to pay anything into the fund when they use contractors. So, the more workers are classified as contractors rather than employees, the less a company will have to pay -- and the less money the state will collect.

Many of the most populous states use something called the common law test to determine whether a worker is an employee or independent contractor for unemployment compensation purposes. Under this test, a worker is an employee if the person for whom he or she works has the right to direct and control how the work is done, including the details of when, where, and how the work is to be performed.

The state will consider a number of things to determine whether you had the right to control the worker -- for example, whether you provided the necessary tools and equipment for the job, gave the worker instructions, or set the worker's hours. The more you can show that this friend of yours worked on her own, with her own equipment and on her own schedule, the better your chances of success.

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