Legal

As the economy improves, you may be reluctant to hire new employees but still need extra help to meet increased demand. Some alternatives: independent contractors, temporary workers, or even summer interns. Be sure you understand the tax and legal issues before engaging this type of help.

Independent contractors
IRS worker classification. One of the hottest audit targets is worker classification. You may treat a worker as an independent contractor (IC) because you believe this is the correct treatment, but the IRS may think otherwise and reclassify your worker is an employee. Result if the IRS is correct: You could owe back employment taxes, plus interest and penalties. You may also owe back state unemployment taxes as well as be liable to the worker for fringe benefits, such as medical coverage and retirement plan contributions. Total cost for misclassification can break the bank. What to do:

• Use the correct classification. This depends on your degree of "control." If you have the right to say when, where, and how the work gets done, the person is your employee, regardless of any label you may use or whether you actually exert such control.
• Be consistent. If you are using workers as ICs and have done so for years, treat others you hire in the future doing similar work in the same way.
• Use an IC agreement. While the agreement itself does not bind the IRS to your choice of classification, informing your worker that he/she is obligated to pay taxes and not eligible for employee benefits is important information to communicate in writing.
• Issue Form 1099-MISC. If you pay an IC $600 or more in total for the year, be sure to give the person this information form. It shows the company's classification of the worker and can help to minimize penalties if it later turns out that your classification was incorrect.

National Labor Relations Board. Employees can be unionized, ICs cannot, so unions often press to classify workers as employees. Recently, a federal court decided that FedEx drivers are ICs because they can change routes, hire employees, and sell routes. Unions may eventually appeal this case to the U.S. Supreme Court.

State level concerns. States may weigh in on worker classification for purposes of unemployment benefits and workers' compensation. For example, a former IC with no work from you may decide to submit a claim for unemployment benefits on the belief that your company should have treated him/her as an employee. The state must then determine whether the worker had really been an employee at the company who is now entitled to receive unemployment benefits.

Note: Under the Questionable Employment Tax Practices (QETP) program, there is information sharing between the IRS and, at present, 34 states on this issue of worker classification. However, there is no certainty that the IRS and a state will reach the same worker classification decision with respect to a particular worker.

Temporary workers
Temporary employment agencies, such as Kelly Services and Manpower, place millions of temporary workers with companies each year. Temporary workers are employees of the agencies that place them to work for companies like yours. The agencies are responsible for all employer obligations, including payroll taxes and workers' compensation. Your obligation is to pay the per-hour fee charged by the agencies for the workers they place with you. You can terminate the arrangement (usually at will). If, for example, you are not satisfied with the work being done, you can ask the agency to send a replacement.

Summer interns
Many business owners are under the impression that using summer interns is a way to get work done for free. They are wrong. Using summer interns involves a fair amount of time on your part to train and supervise their work. You may also be required to pay them at least minimum wage. The Fair Labor Standards Act (FLSA) has six criteria that must be met in order to not pay interns who work for you. Essentially, to avoid paying interns, you must provide training that is for their benefit, not yours.