Climbing Guides Staff: Employees or Independent Contractors?
I have been in the process of hiring staff this spring, which means figuring out the legal and insurance parameters associated with hiring and employing people. While this is not rocket science, it's one more hurdle small business owners must research to understand, and clear, quality information is difficult to find. When I search for information on hiring guides (climbing guides, rafting guides, fishing guides, whatever) on the Internet, I find NOTHING, so I thought I'd share my experience in case it helps anyone... or so someone can tell me I have it all wrong. My buddies Bill and Dave are Madison employment attorneys who are kind enough to help me with some of the legal questions I've had. These guys help employees and confront their employers about unfair business practices all the time, and are particular experts in the abuses stemming from misclassification of independent contractors. The awesome thing about being friends with these guys is it makes me very aware of the trouble one can get in as an employer if you don't do things right.
Hiring as Employees vs. Independent Contractors
So the main legal/business question in hiring climbing guides is do you hire guides as independent contractors or as employees? Most small business owners like the idea of hiring staff as ICs because it's simpler: no payroll taxes, worker's compensation insurance, etc. But hiring guides as independent contractors is not the silver bullet it seems because:
A. There are many conditions you must meet. To be legally considered an "independent contractor" in Wisconsin, you must pass ALL these tests:
1. Maintain a separate business. 2. Obtain a Federal Employer Identification number from the Federal Internal Revenue Service(IRS) or have filed business or self-employment income tax returns with the IRS based on the work or service in the previous year. (A social security number cannot be substituted for a FEIN and does not meet the legal burden of s. 102.07(8) of the Act.) 3. Operate under specific contracts. 4. Be responsible for operating expenses under the contracts. 5. Be responsible for satisfactory performance of the work under the contracts. 6. Be paid per contract, per job, by commission or by competitive bid. 7. Be subject to profit or loss in performing the work under the contracts. 8. Have recurring business liabilities and obligations. 9. Be in a position to succeed or fail depending on business expenses and income.
Most at-large guides I know don't have their own business or FEIN number, let alone a standing contract with their employer, thus they are not legal independent contractors. Even if they do have their own business and a contract, they don't pass the IRS Independent Contractor guidelines because if the majority of cases they can't meet requirements 4, 6, 7, or 9.
B. Hiring ICs directly conflicts with most liability insurance requirements. For example, my liability insurance requires my guides to be "under my direction and control." But WI state law defines an IC as someone explicitly NOT under my direction and control. Clearly, this is an obvious conflict.
Why Guides Care
So why do guides care if they are being paid illegally as independent contractors? Five reasons:
1. The face-value of your pay is mis-leading. Employers hiring ICs can offer higher face-value pay rates because they don't have to pay insurance and payroll taxes. But when the guide has to pay 26% employment tax next spring and/or realizes he has no Workers Compensation coverage, the true wage becomes clearer.
2. If a guide is hurt on the job, Worker's Compensation insurance will cover them as an employee, but not as an independent contractor. While guiding isn't "dangerous" per se, there is certainly more risk than working in an office. If you're working on cliff edges, you want to be covered financially in case you cannot work due to an injury/accident.
3. Independent contractors are not eligible for overtime pay, while employees are. So if a guide is working more than 40 hours/week as an IC (pretty easy to do in seasonal guiding work), the guide service is probably not paying time and a half when it is legally required to.
4. The guide service should be sharing employment tax burdens. A guide service pays 50% of employee Social Security, Medicare, and withholding taxes, but ICs are required to pay this themselves. So while the guide service is happy to forgo these costs, most guides are not (if/when they realize it).
5. ICs end up being double-taxed as sole proprietors at the end of the year. Not only do they have to do extra work to file taxes, but they may not have realized the tax burden involved and failed to set aside appropriate funds. While it's true they can claim expenses against the taxes they owe, it's not typically enough to offset the benefit they would have receives as legal employees.
So that's why some employees ask their employers for financial redress after being misclassified as an independent contractors. Makes sense, eh?
Do Your Research
There are lots of insurance policies out there and all states have their own legal peculiarities, so do your research and learn what fits in your context. Most guide services don't want to receive notice they are being sued by their entire guide corps for multiple years of inadequate pay - it can be a big bill. And this goes for guides just as much as business owners - if your employer hires you as an IC, there's a good chance it's because they benefit, not you. Know your rights and make sure everyone is treating each other fairly.
