As the economy continues to slump, many companies have, and continue to, seek ways to reduce overall labor costs. One method of doing this is by employing independent contractors instead of having employees. As opposed to a regular employee, employers are not responsible for paying employment taxes or benefits for, or to, independent contractors, which reduces the company’s overall labor costs.

While this may save employers money, it comes with some risk, as not every worker can be classified as an independent contractor. Further, federal and state governments have started to look more closely at how employers are classifying their employees and whether their independent contractors are, in fact, independent contractors because both the federal and state governments could use the additional revenue that employment taxes would provide them.

Employers wishing to classify their workers as independent contractors can take several steps to help ensure their workers are properly classified as independent contractors or employees. While following these guidelines does not guarantee a federal or state agency will find a given worker an independent contractor, these guidelines will help an employer make a strong argument in favor of a worker’s independent contractor status:

1. Have a written contract with independent contractors spelling out their independent contractor status;

2. Exhibit as little control as possible over your independent contractors; in other words, if you contract with them to do a job, the independent contractor should be free to do the job as he pleases with little, if any input, from the employer.

3. Make sure to issue 1099’s to independent contractors as opposed to the traditional W-2 given to employees

4. Make sure workers doing the same type of work are consistently classified as either employees or independent contractors;

5. Keep records of any proof that an independent contractor offers his or her services to other businesses. Here, a Yellow Pages ad or website can go a long way.

Other factors federal or state governmental agencies may look for are: 1) does the employer provide the independent contractor with the tools necessary to perform his or her job?; 2) do you pay for an independent contractor’s workers or does the independent contractor pay them?; 3) do you provide training to the independent contractor?

Misclassifying your workers as independent contractors exposes an employer to liability for past due employment taxes and penalties as well as potential lawsuits filed by the workers who were misclassified seeking the benefits for which they would have been eligible.