Worker Classification: Part Two

In my last post, I explained the critical importance of properly classifying your workers as either employees or independent contractors. Indeed, I warned you that if you do not classify your workers in accordance with state and federal guidelines, your staff incorrectly, your business could be subject to hefty penalties and retroactive interest.
Since it is so important to understand how the State of Illinois and the federal government evaluate the status of a worker, I’d like to discuss this subject in greater detail. That way, you’ll become more familiar with the evaluation factors, so you can better protect your business.

Illinois’ Factors

As I’ve previously mentioned, the Illinois courts rely on a ten factor “right to control” test. This tool enables the state to conclude whether or not your workers are employees or independent contractors. The difference between the two types of workers matters from a governmental perspective for purposes of employment benefits and taxation.
These ten factors cover a wide range of circumstances. Most importantly, Illinois wants to know how closely you manage your worker. For instance, does this individual receive training, materials and direction from you? If so, it is likely that the state will conclude that you “control” the worker and therefore, this worker is properly classified as a “controlled” employee rather than an “uncontrolled” independent contractor.

Other aspects include:

·        Worker engagement – Illinois will look at whether or not the worker performs duties for other employers. If he is exclusively employed by your business and is not available for hire, then the state will see him as an employee.

·        Worker skill – The state evaluates the amount of skill needed to do the work in a particular company. In general, if more expertise is necessary, the state tends to classify the worker as an independent contractor.

·        Employment length – The period of time a worker has offered you services can make all the difference to the Illinois courts. If this individual has worked in your company for a short time, she’ll usually be viewed as an independent contractor. Conversely, a worker who has a longer history with your business will probably be recognized as an employee.

·        Payment method - If you pay your workers on a project-by-project basis, chances are that the state will see these individuals as independent contractors. On the other hand, salaried or hourly workers are more likely to be categorized as employees by Illinois.

·        Integral or ancillary – An integral worker is considered part of the company’s regular business. The fact that he performs a key function in the business, it’s probable the courts will look at him as an employee. At the other end of the spectrum is the ancillary worker, who is an occasional contributor to the company and not involved in its operations on a consistent basis. The ancillary worker will likely be viewed as an independent contractor.

In general, the underlying theme to remember is how much control the business exerts over its staff members.

Similar to the state’s court system, the Illinois Unemployment Insurance Act examines the amount of power you have over your workers in order to determine the correct categorization. But instead of ten factors, there are only three. Furthermore, all three of these circumstances must be met for a worker to be recognized as an independent contractor. Otherwise, the worker is deemed to be an employee.

Below are the factors this statute systematically applies:

·        The business does not control the worker’s performance.

·        The service cannot take place during the normal course of business or at the physical location of the company.

·        The worker has to offer an occupation or profession that’s separate from your business.

Again, control is the key. This means that the less supervision you have over a worker, the better the argument for classifying this individual as an independent contractor.

The Internal Revenue Service’s Factors

Like the state of Illinois, the Internal Revenue Service (IRS) also evaluates employment status based on the right to control. Therefore, if you direct, train and integrate workers’ services into your business operation, for example, it’s reasonable to expect the IRS to define your staff as employees rather than independent contractors. This means that you’ll be required to pay certain taxes and possible penalties, if you have misclassified your workers.

While the amount of regulation over your workers is a critical element of the federal government’s final judgment, other components are also involved to generate this decision. In total, the IRS relies on twenty different factors. These essential circumstances include:

·        Reports – If a business requires written or oral reports as part of the job, then the IRS could assume the worker is an employee. This consistent expectation suggests the worker is regularly supervised, which supports the government’s theory of permanent employment.

·        Payment of expenses – If a company covers workers’ travel or business expenses, the government may conclude they are employees. That’s because the payment is interpreted as control over the workers.

·        Realization of profit or loss – If workers can experience a profit or loss as a result of providing services to a business, they will be probably be viewed as independent contractors.

·        Working for numerous companies – If a worker provides products or services to several unrelated businesses, it’s likely the IRS will see him as an independent contractor.

·        Right to discharge – If a business has the right to discharge its workers, then the IRS might regard these individuals as employees. An independent contractor is protected from being fired unless he does not live up to contract specifications.

·        Right to terminate – If a worker can terminate her employment without any liability, then the federal government will generally look at this individual as an employee.

Need More Help?

Worker classification encompasses many detailed factors. So it’s understandable to feel overwhelmed by the numerous elements. But as a small business owner, you need to be aware that if you group your workers incorrectly, you could face harsh tax consequences.

However, my team and I at DregerLaw are well-versed in all of the factors the state and federal governments use to determine worker status. Let us make sure you’ve designated your staff correctly.

Understanding Restrictive Covenants

Trust, But Restrict

               Creation of a business requires a certain amount of trust. That’s because even if you’re the driving force behind your company, you still must rely on other­­s to assist you. The reality is you just can’t perform every role yourself.

               So, trust has to be part of the equation. But problems arise, however, when you trust the wrong people. Unfortunately, some individuals won’t hesitate to steal the confidential information behind your business and profit from it at your expense.

               For this reason, it is crucial to protect your company from being raided by those within your circle of trust, by using non-disclosure agreements (NDAs) and restrictive covenants. In a recent post, I provided an overview of NDAs and restrictive covenants and I explained that they are designed to ensure that the secrets of your business do not get shared without your knowledge and consent. Now, I want to discuss these agreements in greater detail, so that you understand how they can be applied to give you the power to guarantee that the confidential information of your small business is never compromised.

NDAs

               Typically, an NDA is a one-page document that you require be signed by anyone outside your company with whom you must reveal confidential information in order to explore how this individual can enhance your business. Once the document is signed, the person is bound by this contract and is prohibited from ever revealing the sensitive information that you’ve shared, even if you ultimately determine not to enter into a formal business relationship with this individual.

               If, for whatever reason, this individual violates or even attempts to violate the NDA, you have the right to take the individual to court to secure a restraining order to keep the individual from disclosing the secrets of your business. The NDA also will allow you to have this individual pay you for all of the attorney fees that you incur to enforce the NDA. As a good business practice, always make sure that you clearly explain this aspect of the NDA, so people are well aware from the start that there are dire consequences for ignoring the terms of the NDA.  

Restrictive Covenants (Clauses)

               In contrast to an NDA, a restrictive covenant is used with individuals that are already inside your company (i.e. employees) or non-employee individuals with whom you have decided to do business (i.e. independent contractors). But the idea behind a restrictive covenant is the same as the NDA, in that restrictive covenants are designed to protect the unauthorized disclosure of your business secrets without your knowledge. Restrictive covenants /clauses typically provide three separate protections:

·        The Confidentiality Clause is similar to the NDA. Its purpose is to make sure that confidential information, such as sensitive financial information, customer lists and other trade secrets of your business (sometimes referred to as “intellectual property”), stays private. This keeps your competitors from using this sacred information to unlawfully gain a competitive advantage over your business.

 

·        The Non-Conversion Clause is a natural follow-up to the non-disclosure. It states that once new employees or independent contractors have been given access to your intellectual property, they won’t attempt to steal your workers, suppliers or vendors. Basically, your staff is barred from trying to build a separate business for themselves of for one of your competitors, based on your ingenious ideas.

 

·        The Non-Compete Clause is the final of these three essential protective documents. It tells your staff members that they cannot go out and compete with you in any form whatsoever. You want to make sure, after you have revealed the secrets of your business to trusted individuals that they won’t apply this key information, to their own company on your territory.

               All three of the restrictive covenants can be easily embedded into an existing employment agreement. That way, every member of your staff, whether full-time or part-time, will fully understand that they have clear restrictions on what they can reveal to the outside world. Equally important, these employees or independent contractors will know that if they ignore these restrictions and instead, try to profit on the back of your business, the consequences of their violating the restrictive covenants will be severe. Just like with the NDA, their violations will expose them to serious court action and personal judgments, separate from being fired.

               When you give the restrictive covenants to an independent contractor or someone whose services you’ve hired from outside your company, the restrictions should be part of your Independent Contractor Service Agreement with this individual or theses restrictions may be contained in a free-standing separate two-page document.

Duration

               Non-compete clauses remain in effect for three to five years after the employee relationship ends. Consequently, the covenant serves as a meaningful deterrent, as it blocks this person from interfering with your business and stealing your clients for a significant period of time.

               Even harsher, is the duration of the confidentiality clause. This one is typically for life. That means that the people to whom you have revealed all of your trade secrets, can never share this information with anyone without your authorization, except under extreme circumstances (i.e. court order).