This Labor Day week, let’s look at employee classifications to make sure we’re doing right by our company’s most valued human resources.

Employee misclassification is a costly and common mistake—as many as 30 percent of companies (even big ones!) misclassify employees as independent contractors. It’s tempting to classify contractors over employees; savings in social security and unemployment taxes, benefits, and overtime can shave up to 40 percent off of labor costs. But if the IRS or the Department of Labor decides these contractors are actually employees, that “savings” will come with a side of fines and back taxes and pay, as Uber and FedEx recently discovered to the tune of hundreds of millions of dollars.

Don’t want to be on the hook for a simple mistake? Learn the three criteria the IRS uses to evaluate worker classification: 1) behavioral control; 2) financial control; and 3) type of relationship between business and worker.

1. A business with behavioral control has the right to direct or control how a worker performs the work, through instructions, training, or other methods.
2. A business with financial control has the right to direct or control the financial and business portions of the worker’s job.
3. The type of relationship explores how the worker and business owner perceive their relationship with one another.

With that criteria in mind, these tips can help to differentiate between employees and independent contractors:

• A worker who is told how, when, and where to do work is an employee. Example: The worker must arrive in the office by 8 a.m. daily and stick to a 30-minute lunch.
• A worker who is told a desired end result, but who is free to choose how to achieve that result, is most likely a contractor. Example: The worker is given a deadline of November 21 and is required to attend six planning meetings, but the work process is at the worker’s discretion.
• A worker who receives performance reviews or health insurance, or who works without a contract, is most likely an employee. Contractors typically operate under a written agreement with start and end dates and expected responsibilities and results.
• A worker who needs permission to do a project for another business is an employee. Contractors work independently and are free to do work for anyone they choose.

When in doubt about a worker’s classification, consider seeking advice from an HR professional, legal counsel, or even the IRS. Both employers and workers are able to file IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, which lets the IRS make the classification call. (They’ll be right every time!)

Don’t want to bite your nails while the IRS determines your business’s employment-tax compliance? Make the first move with a Human Resources audit. The experienced HR professionals at YES! Your Human Resources Solution can help you do that. We’ll review your employee data and eligibility forms for compliance, and we’ll make recommendations to help your business avoid potential tax penalties. (Of course, your legal team will want to be involved for the final changes!) Learn more about how a Human Resources audit can help your business.