Because of the expense of an employee, many small businesses rely on both traditional employees, as well as subcontractors (aka: independent contractors). You may assume that because a worker is not on your payroll this means he or she is not an employee, but think again. The Department of Labor differentiates between the two types of hired workers and this distinction can make a huge difference on following mandated worker's compensation regulations.
Subcontractor vs. Employee in NH
In general, the difference between an employee and a subcontractor comes down to how much control the employer has over the worker and how the worker is compensated. Subcontractors typically supply some or all of their own materials and tools and can choose what work they will agree to complete. They also do not usually receive a regular paycheck from the employer, but are paid an agreed upon amount, for a specific amount of work. How and when an independent contractor completes the work is left up to him or her, as long as he or she finishes the job in the time outlined in the contract. Subcontractors are also not eligible for employer-sponsored benefits, such as life and health insurance. The work that subcontractors do is usually not a central part of the overall business model, and the work is typically temporary.
How Does the NH Department of Labor Distinguish Between an Employee and a Subcontractor?
In New Hampshire, the boundaries between the two roles are spelled out by the Department of Labor to eliminate any confusion. A worker is considered an employee unless he or she meets all of the following criteria. If all of the following criteria are met, the worker is a subcontractor:
1. The person possesses or has applied for a federal employer identification number or social security number, or in the alternative, has agreed in writing to carry out the responsibilities imposed on employers under this chapter.
Translation: Acting as an employer, subcontractors must agree to the responsibilities of an employer, including paying the employer portion of the federal taxes from their identification or social security number.
2. The person has control and discretion over the means and manner of performance of the work, in that the result of the work, rather than the means or manner by which the work is performed, is the primary element bargained for by the employer.
Translation: Subcontractors agree to complete a certain task for the employer, but maintain control over how that works get done.
3. The person has control over the time when the work is performed, and the time of performance is not dictated by the employer. However, this shall not prohibit the employer from reaching an agreement with the person as to completion schedule, range of work hours, and maximum number of work hours to be provided by the person, and in the case of entertainment, the time such entertainment is to be presented.
Translation: Employees are typically required to work set hours for the employer. Subcontractors have the right to perform the work whenever they choose, so long as it stays within the bounds of their agreement with the employer. Contractors who provide entertainment can be held to a set time for a performance.
4. The person hires and pays the person’s assistants, if any, and to the extent such assistants are employees, supervises the details of the assistants’ work.
Translation: A subcontractor hires and supervises his own assistants, and pays for them himself. An employee would have assistants hired and under the direction of the employer.
5. The person holds him or herself out to be in business for him or herself or is registered with the state as a business and the person has continuing or recurring business liabilities or obligations.
Translation: A subcontractor works for him or herself, running their own business. They must register with the state and has the same responsibilities as other businesses.
6. The person is responsible for satisfactory completion of work and may be held contractually responsible for failure to complete the work.
Translation: Subcontractors are bound by a contract to the employer to complete the work to the satisfaction of the employer. If the work is not completed, the employer can take legal action.
7. The person is not required to work exclusively for the employer.
Translation: Quite simply, the subcontractor can provide services to whomever he or she chooses and is not obligated to stay with one employer.
Again, if all these conditions are met, the worker will be considered a subcontractor. The employer will not be responsible for providing benefits, paying taxes on the worker, or other obligations typically associated with the employer/employee relationship. Employers may still need to carry workers compensation insurance on the subcontractor if he does not provide his own. Given these guidelines, employers and workers can determine the proper work classification to arrive at a mutually agreeable employment situation.
What if I Disagree with the Classification of a Worker?
If you have a worker's compensation policy in place, the insurance company could call into question the classification of a worker at audit time. If there has been a work-related injury and the classification of a worker is in question, both the insurance company and the state will get involved. You have every right to provide evidence to each party justifying your position; however if the worker does not meet all of the criteria shown above, you will have a difficult case.
If I Don't Have Any Employees Why Would I Need NH Workers Compensation Insurance?
Again, this is a tricky question as your opinion may differ from the state. The safest course of action is to take out a worker's compensation policy with no employees. This can cover the situation if you bring in a questionable sub or perhaps a worker to do a temporary project. If such person were injured, you would at least have a policy in place and not likely subject to the fines and penalties you would otherwise face if found not carrying a required workers compensation policy.
What if I Decide Not to Carry Worker's Compensation?
As worker's comp is required by law, you could be breaking the law and subject to a fine and daily penalty for every day you go without it. This could easily bankrupt a business. This law applies to full-time, part-time, volunteers and family members who work for you. Those who are self-employed, sole-proprietors or partners are not required to carry worker's compensation on themselves, though they can elect to. However, once there is a 4th executive officer or LLC member, a worker's compensation policy must be in place or penalties will apply.
What if I Have a Worker's Compensation Policy but Mis-classify an Employee?
Worker's compensation policies are audited at the end of the policy term by the insurance company, given that it is originally rated on estimated payroll. Businesses are required to comply with the audit and provide the necessary financials to ensure that employees and subcontractors are classified correctly. If there was an oversight, it will most likely be caught during the audit and corrected. The bad news is that you will have to pay the premium owed so it is typically better to get it right the first time around.
Get Professional Advice:
Even for an experienced insurance professional, there are shades of gray in classifying the employee/subcontractor relationship. Given the severity of the consequences it is critical that you obtain advice from an insurance agent before someone works for you either as an employee or subcontractor. There is too much on the line to guess.