Jared Wells

Under law, what is the key difference between a contractor and employee?

The primary factor in determining the relationship lies in the right of the company to direct and control the manner and means in which the instructor carries out the job, regardless of whether this right is exercised or not.

While there are a number of factors that states use to determine the classification of the relationship between center and instructor, here are some simple questions to ask:

• Do you require your instructors to offer services only to your company?
• Do you dictate how the instructors work with the student?
• Do you choose the materials the instructor uses?
• Do you determine the location of the work/sessions?
• Do you train your supervisors?
• Do you supervise your instructors and provide direction?

If you answered, "Yes" to any of the above questions, then your instructors are most likely legally viewed as your employees by the state. By default, states will usually classify instructors as employees.

The burden of proving that your instructors are contractors lies with your company. While it depends on the laws in the state in which you operate, there are some common things to consider when classifying your instructors.

• Tax withholdings
• Social security contributions
• Other state and federal taxes
• Worker's compensation

What do you risk if contractors are determined to be employees?
If you are audited and your contracted instructors are determined to be employees, you can be held responsible for past employee withholdings, social security contributions, federal and state taxes, and can be fined for not having worker's compensation. In addition, most insurance companies will not insure a company that has had employees that were not covered by a worker's compensation policy.

In California , for example, a company's only option in this situation is to insure with the State Fund, often at a higher rate.

You may also have problems with your general liability policy if a contracted instructor gets hurt on the job. The carrier will want to argue that the instructor is an employee and not covered under the general liability policy.

Needless to say, if you classify your instructors as contractors, you should be able to argue a very strong case. In other words, you must have the ability to offer substantial proof that you can truthfully answer 'no' to all of the determining questions mentioned above.

Education companies that work with contractors can be thought of as instructor brokers. Clients contact the company and in turn the company contracts with the instructor to service the account.

Most education companies choose to exercise more control and oversight of their instructors and hence have established an employee relationship. While hiring employees can add additional costs and administration, the benefits of oversight, training, and control can ensure a higher quality of service that can translate to increased revenue.

NOTE: I am an education center owner and NOT an attorney. This article should be used as an introduction to the issue of employee classification. Seek professional advice of an attorney before setting policy around employee classification.

Jared Wells is the President of LearnSpeed LLC , maker of CenterTrac supplemental education data management systems. CenterTrac is helping tutoring, test preparation, and other education companies across the country to improve administrative efficiency, quality of service, and profits. Learn more about CenterTrac by visiting www.centertrac.com .