Many new business owners in the hospitality business struggle with classifying their workers as employees. Starting a business can be an expensive operation that involves many different expenses, taxes and fees. One of the most common ways that employers try to save money in industries such as restaurants and bars is hiring their cooks, servers and even bartenders as independent contractors.
By doing this, the employer eliminates its obligation to pay payroll taxes, unemployment and maintain Worker’s Compensation and disability insurance. In addition, its liability to the workers is kept at a minimum. Sounds perfect right? Well, of course it does – probably because it is not a very good idea!
While the occasional family member/friend helping out as a server on a busy day, or an attorney who comes in once or twice a year to update corporate documents or assist with legal matters are typically classified as independent contractors, regular servers, bartenders, and even cooks usually fall under the “employee” category.
By classifying all workers in a restaurant/bar environment as independent contractors, the employer is being exposed to more responsibility and liability than it thinks. Not only are there legal consequences for misclassifying employees to eliminate payroll taxes, but there is also more responsibility on the employer to maintain a relationship that is not indicative of an employer-employee relationship.
For instance, while an employer may want to eliminate the employer-employee relationship with the worker, if he wants to control any of the following components of employment, it may not be able to successfully claim that the worker is an independent contractor:
- The worker is paid at an hourly rate;
- The worker is provided with training (either on-the-job training, orientation, or staff meetings);
- The worker receives employment benefits, including healthcare, vacation time, and/or discounted company products/services;
- The employer determines when the worker works (time, place, role); and/or
- The worker can be fired/discharged at any time during employment without a breach of contract claim available to the worker.
Additional factors that determine the difference between employee and independent contractor can be found in an earlier article: Employee or Independent Contractor? – That is the question As you can see, there are a variety of factors that help the IRS determine whether or not a worker is an employee or not. If a worker is classified as an independent contractor but, using the IRS 20-factor test, it is found that the worker is in fact an employee, there can be penalties and tax consequences of misclassifying your employees that will cost you more than you would have saved.
While the initial savings may seem beneficial to your business venture and worth it, understand that there is a lot more effort required when an employer has to work twice as hard to ensure that the workers are NOT employees in a role and work environment that usually requires an employer-employee relationship. Even with the effort, the relationship may inherently exist because of the nature of the business. As a result, it may be in your best interest to take a hit with the initial costs to ensure that you are working within the parameters of the law.