How to determine if you should classify your team as Employees or Independent Contractors
Time To Pet is not a law firm and does not provide legal advice. It is best to consult with a lawyer regarding specific questions relating to worker classification. Worker classification can vary by government agency and from state to state. This is meant to be a guide to help pet sitters and dog walkers understand the general differences between Independent Contractors and Employees and to help direct them to more resources.
The Great Debate
One of the most common questions we hear our customers discussing is the great Independent Contractor vs. Employee debate. Historically, many Pet Sitting or Dog Walking companies would use Independent Contractors (or ICs) instead of employees. Why, you ask? Well, the answer is pretty simple. Using ICs is perceived to be less expensive, and in certain situations — it most certainly can be. Having Employees requires the Employer (you) to pay state and federal unemployment tax, social security tax, and workers compensation/disability premiums. If your business uses ICs — you are not required to make these payments. Sounds great, right? Well, it is — except you don’t just get to call a worker an Independent Contractor. Your staff members need to meet specific requirements to classify as Independent Contractors. It can be a little confusing, and many dog walking and pet sitting companies may be currently misclassifying their workers.
How To Classify Your Workers
So what are the requirements for how you classify your team members? This is where the debate can get tricky. There really is no one definition of what makes an Independent Contractor. The subject can be variable, especially on a state by state status. In an attempt to clear things up a little, we can look at the guidelines stated by the IRS. The IRS has a set of common law rules to determine worker status. These rules fall into three distinct categories:
- Behavioral Control: This relates to whether the business directs and controls what type of work is done and how the work is done; through instructions, training, or other means. That means if you use independent contractors, you cannot have an employee manual that they must follow. You cannot provide specific rules or oversight to contractors. You also cannot monitor contractors with GPS. Contractors are not under any obligation for permanent or recurring scheduling.
- Financial Control: Financial control refers to the authority that a business has over the financial aspects of the worker’s job. An independent contractor will typically invest in the equipment necessary for the work, and they are permitted to advertise and seek additional dog walking and pet sitting work – even if that means working for your competitor. It also means that they must purchase their own insurance, which can be very expensive.
- Relationship: Many companies have written contracts describing the relationship the parties intended to create. They must define the permanency of the relationship. The business determines if they will provide any benefits to their workers, such as insurance, pension plans, vacation pay, or sick pay. Finally, if the worker performs duties that are the primary source of income for the company, they are more than likely an employee.
California ABC Test
California has taken steps to make the designation even more understandable. According to the ABC Test passed by California State Supreme Court:
A hiring entity classifying an individual as an independent contractor now bears the burden of establishing that such a classification is proper under the “ABC test.” To do so, the entity must prove each of the following three factors:
(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
More than twenty states are already using some type of ABC test when making classification designations for workers. California is trying to get ahead of the growing trend towards the “gig economy" and based on their classification methods, it is highly unlikely that any pet sitting or dog walking business would pass this test.
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Are they Independent Contractors or Employees?
It’s definitely a bit confusing, right? What does this all mean for a Pet Sitting or Dog Walking business? In the simplest and generalist of terms — an Independent Contractor is an entity (a business or a person) that you hire to complete a job. You don’t have any input into how the job is completed, and you can’t provide materials to complete the job, such as training or an employee handbook. The Independent Contractor is not entirely dependent on you for their salary. They work for several businesses providing their service. Think of when you hire an accountant to complete your taxes. You are not telling them how to do their job, they are doing taxes for many people, and you are not letting them use your calculator.
Does this sound like how your workers operate, or how you expect your workers to operate? For the vast majority of pet care companies — their staff members are not ICs. You most likely train your staff, provide them with poop bags and a leash. They depend on you for their salary, and they are an integral part of your business. They are probably covered under your insurance as well.
However — if you wanted to know for sure, you can submit a Form SS-8, and the IRS will decide on the “worker status” for you.
So what happens if you decide to classify your workers as ICs when, in reality, that are Employees? Well, first, you are subject to an audit. Depending on the findings, you can also be subject to wage reimbursement for your workers, tax payments, tax penalties, retroactive payments of wages, and more. That’s why it is crucial to get this debate right the first time.
5 Reasons Your Independent Contractor Pet Sitters May Be Employees
For a growing Pet Sitting or Dog Walking business — the decision to use Independent Contractors vs. Employees is one of the earliest, hardest, and most important choices you make. On the surface — using ICs makes a lot of sense. You don’t need to classify them as employees, which means you don’t need to pay for all the employment taxes. However, classifying your staff as ICs doesn’t necessarily make them ICs in the eyes of the IRS. You need to treat them as ICs by following the guidelines the IRS has created. So what are the guidelines?
While they can be challenging to understand — the IRS has created a 20 Factor Test to help you know if your staff members are employees or ICs. We’ve spent significant time researching this and have concluded that for most (not all - but most) Pet Sitting or Dog Walking companies — their staff members are employees. Here are the top 5 reasons we believe that:
- If your staff members are receiving instructions from you about when, where, and how they are to provide pet sitting or dog walking services — they tend to be employees. This means that a representative of your business is informing a staff member to “please walk John Doe’s dogs on Wednesday at his house between 1–2 pm.” While this isn’t always the case — it is a strong indicator to the IRS that your staff members are employees.
- If the success or continuation of your business is dependent on your staff members — that indicates an employer/employee relationship. Would your business remain successful if your ICs no longer provided services? Would your business be able to continue if they no longer provided services? If not — the IRS may consider them employees instead of ICs.
- Providing training to staff members is another reliable indicator that they may be an employee. If you require new staff members to conduct visits with or shadow an experienced staff member — the relationship is more than likely that of an employer/employee. This can also include training materials you give to new staff, training seminars, or other instances where you train workers on how you expect them to provide services.
- A continued relationship between your business and the staff member is another indicator. This does not necessarily mean that your staff member needs to work every week. The IRS states that a continuing relationship could exist at frequently recurring, although irregular instances. If you continue to use the same IC regularly — they may be considered an employee.
- If an IC only provides services for your business — that is one more indicator that they may be an employee. If the IC performs work for multiple pet care companies — that is an indicator that they are an Independent Contractor. However — a staff member that works for several companies may also be considered an employee of each dependent on other factors.
What the Pet Industry Coalition Says
To get an even better understanding of how and why it’s important to make the correct classification for workers, we spoke to a member of the Pet Industry Coalition. The PIC was founded by several prominent dog walking and pet sitting companies to help other pet businesses understand and abide by local and federal laws.
From the Pet Industry Coalition website:
The dog walking and petsitting industry is riddled with companies that misclassify their workers as independent contractors, while asserting total control over their schedules, hours, work ethic and trainings. This has resulted in an unfair competitive advantage. With the new "gig" operators within the dog walking industry, they are only propagating these illegal practices. The companies that are abiding by employment laws and classifying their workers as employees, are subject to minimum wage rules and according taxation. As minimum wage continues to increase, the law abiding companies have been forced to raise rates, disproportionate to the offending companies' prices. These costs have forced many businesses to close their doors."
What are a few benefits of turning independent contractors into employees?
Liability! This extends to insurance benefits, legal protection and the safety and viability of your business. As employees, you do not need to worry that you will be audited and potentially fined and/or shut down. You also don't have to be concerned if your employee gets hurt on the job as Workers Compensation covers these costs. Lastly, employees allow you to dictate how an employee works, who works and whether they meet your employment standards.
It seems intimidating and expensive to classify dog walkers and pet sitters as employees with payroll taxes, social security, workers comp, etc. Is it really that much extra work?
Great question! We find that most companies that come to us are overwhelmed with the process and the potential expenses. The Pet Industry Coalition can help you so that the change to employees is not daunting. We can provide you with equations to employ so that you can forecast all financial increases. If you schedule your staff optimally and ensure your policy handbook lays out all timekeeping expectations thoroughly, the financial additional financial burden should be minimal.
What is turnover like between IC's and employees?
Employees by far have greater tenure but remember that it is your job to EDUCATE workers on what makes an employee classification so much better than 1099 e.g. portion of taxes paid for by employer, minimum wage, overtime, expense reimbursement, paid sick leave and insurance coverage. Once they are aware, they appreciate your commitment to compliance even more.
What is better for the worker?
Employees for all the reasons stated above. I see so many 1099s coming from other dog walking jobs where they were consistently underpaid and held to even higher standards than employees.
What is better for the customer? Do they ever have a preference?
By far employees. Having a 1099 legally means that a contractor could hire someone else to do their job and that that would acceptable under the law. Furthermore, if something happens to the client like theft or harm to the dog, the customer has no recourse other than to sue the contractor. The company holds no responsibility or liability for how the work is done or who does it.
How does having employees affect your company culture vs. IC's?
Having employees shows that you are dedicated to your employees and their well-being. They do not feel like they are being taken advantage of and know that their interests are at the top of your priorities.
Have you noticed the IRS getting stricter with independent contractor laws now that the "gig economy" is becoming so popular?
Yes! California is a great example of this. They recently passed a revised ABC test which makes it extremely difficult to legally employ a contractor. The gig economy created a lot of grey area in the law, so we are saying many states starting to define and make the 1099 classification more difficult.
What would you say to a small pet sitting business with 2-5 staff that is on the fence between classifying workers as independent contractors or employees?
Do it right the first time! All it takes is one worker to either sue or file for unemployment. Once that happens, you are subject to hefty fines, back-taxes and the potential to even go to jail! The small amount you save by employing 1099s does not compare to what would happen if you were audited. Also, remember that there is a statute of limitation for all states where employees can recover back taxes, underpayment and fines for a set amount of years. That means the sooner you are compliant, the better!
Benefits of Employees
As your business grows, you will be spending less time performing actual walks and pet sits. This means that your workers will be representing you in the field. They will be the face of your business and the ones representing you to your clients. Hiring is almost always one of the top issues that new companies have.
A few benefits of classifying your workers as employees:
- You can create standard practices and training for all your employees. Including a training manual and code of conduct.
- Create a company culture. You have shirts, specialized tools.
- You can have your employees sign a non-compete, so they don’t end up splitting time with one of your competitors and possibly taking business with them
- Offer consistent walkers/sitters to your clients. They will know the person they are dealing with and feel reassured
- Hiring one good employee with full availability can save you the headache of having to hire many IC’s
What do I do with all this information?
Ultimately, the employer is responsible at the end of the day for worker classifications. You must consider what is best for your business, but also consider what might be best for your workers and customers.
Misclassifications happen, especially when you are new to the business. If you have misclassified a worker, fix it ASAP and pay any tax adjustments if needed. If you are unsure, start by hiring an employment law attorney. They will be familiar with the most recent employment laws in your state and will be able to guide you through the process. They can also alert you of any law changes in the future.
- Speak to an employment law attorney
- Have policies and procedures in order before hiring employees or independent contractors
- Have a clear understanding of how to classify your workers
- Update classification as your business grows. Roles may switch from IC to employee over time.
As a reminder, Time To Pet is not a law firm and does not provide legal advice. It is best to consult with a lawyer regarding specific questions relating to worker classification. Worker classification can vary by government agency and from state to state. This is meant to be a guide to help pet sitters and dog walkers understand the general differences between Independent Contractors and Employees and to help direct them to more resources.
For additional resources on Independent Contractors vs. Employees, please check out the following:
- IRS — Independent Contractor Defined
- IRS — Topic 762 — Independent Contractor vs. Employee
- IRS — Publication 1779 — Independent Contractor or Employee
- IRS — Form SS-8 — Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
- IRS — Employer’s Supplemental Tax Guide 2016
- SBA — Hire a Contractor or Employee
- Oregon.gov — IRS 20 Factor Test — Independent Contractor or Employee?
- Nolo.com — Independent Contractor or Employee: How Government Agencies Make the Call
- Legalzoom — What You Need to Know About Hiring Independent Contractors
- Department of Labor — Economic Reality Test