1. What Are the Benefits of an Independent Contractor Agreement?
2. Benefits of Hiring Independent Contractors
3. What Is the Difference Between Employee and Independent Contractor?
4. What Determines if an Employee Needs Worker's Compensation Coverage?
5. How to Determine if Employee Is Eligible for Unemployment Compensation
6. Are Steps Being Taken to Better Identify Independent Contractors?

Trying to understand an independent contractor agreement Hawaii? A business entity is often referred to as an independent contractor. When two parties enter into an agreement to provide services this is called an independent contractor agreement. The two parties can be either individuals or business entities.

What Are the Benefits of an Independent Contractor Agreement?

An independent contractor agreement provides several benefits for both the contractor and the company or individual who is hiring the contractor. For one, it serves as proof that the independent contractor and the hiring company do not have an existing employee/employer relationship. The contract also provides details as to the scope of work that is to be completed, along with the compensation and other expectations.

Benefits of Hiring Independent Contractors

  • Reduced onboarding costs
  • Ability to end the relationship at any time
  • Ability to partner with workers who have a diverse range of skills

What Is the Difference Between Employee and Independent Contractor?

In terms of an employer's responsibilities, there is a big difference in identifying an individual as an employee or an independent contractor. This is especially important when it comes to pension eligibility, wages, worker's compensation, and other things. Federal laws will rule on certain issues but state laws generally determine an employer's responsibility when it comes to worker's compensation, unemployment tax liability, and wages.

What Determines if an Employee Needs Worker's Compensation Coverage?

The relationship between an employer or an employee is what determines if an individual is eligible for worker's compensation coverage. According to the Hawaii Department of Labor, if a person has the power, express or implied, to command how the work will be accomplished by another individual, then an employment relationship has been established.

If a worker is misclassified as an independent contractor when really the individual should have been classified as an employee, there is a process for reclassification. The reclassification can result in back pay, benefits, sometimes, penalties, and fines for the business. A control test will determine if the individual is eligible for worker's compensation. The test looks at whether the person doing the hiring has the power, express or implied to control and direct the way the work is to be accomplished.

How to Determine if Employee Is Eligible for Unemployment Compensation

To determine if an individual is eligible for unemployment compensation, the Hawaii Employment Security Act uses an ABC test. The test determines if the individual is free to perform and complete the work as set forth in the individual's contract. It looks at whether the service is performed outside the usual course of the business and whether the individual is usually working as an individual in an established trade, profession, or occupation as that of which they were being hired.

When determining whether an individual worker is an employee or an independent contractor it is wise to look at the entire relationship and consider how much control and direct power the hiring individual will have. In addition, it is a good idea to document how you come to your conclusion. Unfortunately, the line between whether an individual is an employee or an independent contractor is often blurred, and employers just choose to classify them as either.

The IRS requires that all businesses consider the above-mentioned factors when determining how they will hire an individual to perform work. It's important to remember, the method in determining whether an individual is an independent contractor or an employee, is not a one size fits all, each situation will vary and you will need to consider multiple factors.

Are Steps Being Taken to Better Identify Independent Contractors?

Hawaii and many other states are considering how legislation can better define an independent contractor's status. There is also similar legislation at the federal level.

Employers naturally have more responsibility to employees than to independent contractors and individual contractors lower the long-term risk associated with employees in terms of earning potential and long-term benefits. Regardless, misclassification is a widespread occurrence in the United States, and while at times it is done by accident, other times, it is done in order to reduce labor cost and avoid paying federal and state taxes.

The effect the crucial mistake has on employees is straightforward. They lose workplace protections, face an increased tax burden, and are often not eligible for unemployment insurance and disability compensation. When companies attempt to reduce their costs and add extra flexibility to the workforce, they will often hire independent contractors rather than increasing headcount by hiring more employees.

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