Who is an “employee”? While this premise may seem simple, there are a myriad of statutes, regulatory requirements, and legal precedence that impact the classification of an individual as an employee (or independent / 1099 contractor). The primary focus of this PAN is to provide best practices for the effective recognition of factors that impact an individual’s employment status. One misconception is that an individual is automatically an independent contractor due to the fact that they sign an independent contractor agreement and are paid on a 1099 basis. While these are certainly factors, there are many other elements that impact an individual’s employment status such as (i) does the individual supply his/her own PPE and tools; (ii) who controls the performance of the work (when and how the work is performed); (iii) supervision; (iv) holiday and overtime pay; and (v) does the individual participate in company benefit programs such as PTO and health insurance. The improper classification of labor is a violation of wage and hour law and could lead to citations, fines, penalties, and back pay for owed benefits and overtime.

Labor burden rates are not always an element considered by individuals and businesses. Employers are required to withhold and pay (on top of compensation to employees) items such as FICA payroll taxes, federal and state unemployment taxes, state-mandated workers’ compensation payments, and other Medicare and payroll taxes. In addition to payroll costs, there are other direct cost burdens for employers such as insurance, employee benefit programs, PPE, tools and machinery, and training costs. An example Labor Burden Worksheet is provided to illustrate the direct costs and payroll taxes that employers are responsible for.

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