Classifying employees is becoming more complex in the on-demand economy. This is especially evident after the California ruling that had Uber pay more than $4,000 for expenses and other costs for a worker who spent two months driving for the ride share business, according to The New York Times. The ruling points to the importance of properly classifying a worker as an employee or an independent contractor so you don't face regulatory or legal repercussions down the line.

The Rise of Contract Workers

Businesses don't want the overhead of underutilized employees, who have set wages and benefits. Contract workers, on the other hand, are hired on an as-needed basis and require much less upfront investment.

People are pursuing work at organizations like Uber in order to have more freedom in their lives and not be tied down to a specific work schedule, according to the ADP Research Institute® report, The Evolution of Work: The Changing Nature of the Global Workforce. According to ADP, 80 percent of people surveyed in the U.S. want to set their own schedules, and 81 percent feel positively about the ability to carry out their work when, where and how they want — which organizations such as Uber, Lyft and Instacart offer.

How Finance and HR Can Work Together

Employers of all sizes grapple with whether they still have employee requirements that toe the line between employee and contractors, so understanding how to properly classify these employees under state and federal regulations is critical. This determination is essential because organizations need to definitively know whether the organization is responsible as an employer for unemployment insurance, the employer's portion of Social Security and Medicare taxes, health care and many other employee benefits.

Finance leaders and HR need to work together to determine what blend of employee and independent contractor relationships are most cost effective for their organization, not only in terms of expenses, but also in terms of returns. While employees used to have more long-term loyalty to an organization, ADP reports this is not quite the case with younger-skewing workers. Today, there is less expectation that someone will stay on a job for an extended period, which makes contractors an increasingly appealing option.

Understanding Tax Classification

There are basic rules to help classify workers as employees or independent contractors, according to the IRS. Most qualifications fall under three basic 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?

2. Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?"

As noted in The New York Times, the behavioral issues are the ones that most often come into question, especially because Uber and similar firms have significant control over a worker's duties and how they're performed. If these basic definitions don't suffice, the IRS refers employers and workers to get further information via Form SS-8.

But how quickly the IRS will respond to the form is unknown, and an employer may not want to wait for it. Therefore, it can help to work with a business partner with experience in all types of employer and employee relationships to get insight on how to best classify workers, particularly as work relationships continue to evolve in the on-demand economy.

Tags: Diversity legislation contractors