Colorado legislatures are currently working on new rules to better define contract workers in what some critics say is an attempt to allow more companies to avoid payroll taxes and benefits by classifying employees as independent contractors. In California, lawmakers have made it abundantly clear they are not happy with the employment models of several prominent gig economy companies. Everywhere you turn, the pesky question of worker classification persists.

Worker classification is important because it affects so many things. For example, federal law mandates that employees on the payroll receive extra pay for overtime hours unless they are exempt. Being classified as a payrolled worker also entitles employees to certain benefits including health insurance, workers’ comp protection, and some level of job protection.

Independent contractors enjoy no such benefits. They are truly on their own. The question state legislators are grappling with is whether to expand on existing federal rules in order to derive additional benefits for contract workers in their own states.

How Contracting Benefits Employers

The benefits of employing independent contractors over payrolled employees are significant to employers. Right off the top, employers pay no payroll taxes on their independent contractors. This saves employers money in both wages and payroll processing. That is money that can be put into other things.

Additionally, employers do not have to provide health insurance to contractors even under the rules of the Affordable Care Act. They do not provide retirement plans, dental and vision plans, or anything else. They treat their contractors as the self-employed individuals they are.

Some critics contend that contractors get the short end of the stick because they have to purchase more expensive individual benefits and pay the employer’s portion of payroll taxes. But contractors do get paid more than their hourly or salaried counterparts. The extra pay is intended to make up for the extra expense of being a contractor.

How Contracting Benefits Gig Workers

It may seem as though all the benefits of contract work belong to employers only. That is not the case. Gig workers get some benefits too. First and foremost is the fact that they tend to earn more. Gig workers take home more per paycheck than their payrolled counterparts, on average. They can keep more of that money if they are wise about choosing their health insurance and retirement plans.

Gig workers also have more control over their schedules. They exercise ultimate control over who they will work for by being choosy about their contracts. Finally, they have direct control over how much they earn. If they want more, they can always take on additional jobs.

Getting Classification Right

Setting aside one’s personal view on payrolled workers vs. independent contractors, it is important that employers get this classification right. Both the IRS and state regulators tend to show very little mercy to employers who classify workers as contractors when they should be classified as payrolled workers.

Getting it wrong means paying penalties and fines. According to Dallas-based BenefitMall, taking the risk of getting it wrong is not worth it. BenefitMall recommends employers work with third-party payroll providers if there are any questions about worker classification. A payroll provider like BenefitMall is best equipped to determine how workers should be classified.

The pesky question of worker classification will not be going away anytime soon. As the number of American workers choosing independent contracting as a primary means of employment increases, more companies are going to have to face the question themselves. Let’s hope they get it right – both for their own good and the good of their contractors.