Disguised employment is when a worker acts as an employee but is not classified as one. Disguised employment can result in misclassification, which is when a worker is classified as self-employed, but actually has an employer-employee relationship with the company.
Apart from unintentional error, employers use disguised employment to avoid providing employee benefits such as minimum wage, holidays, or overtime pay.
How can you recognize a disguised employee?
The IRS can identify disguised employment by examining the working relationship between the employee and worker, focusing on how much control the employer has in the relationship.
A few factors that determine if a contractor is actually an employee include:
- If the employer controls the worker’s working schedule
- If the worker is required to work from an office and use the company’s equipment
- If the employer controls the scope of work
- If the employer has say over the worker’s leaves or vacations
Why is it important to identify disguised employees?
When the IRS uncovers disguised employment, it impacts the company’s time, resources, and manpower. For instance, during an IRS audit, employers will need to spend time gathering documents, allocate employees or special teams to cooperate with the IRS or legal team, pay heavy fees or penalties for tax avoidance, and deal with costly attorney fees.
How can employers avoid disguised employment?
One of the first steps in compliance (and avoiding disguised employment) is to create an independent contractor contract that states the employer and contractor’s expectations and roles. The contract should describe the relationship between each party and specify that the contractor has control over where, how, and when they work.
An easy way to avoid disguised employment is by using a global payroll platform that creates compliant agreements between employers and contractors according to local laws and regulations.