Starting a business involves making decisions. These decisions are not just about what is needed for the day. As a business owner, you will have to make decisions that will have an impact further down the line. For instance, hiring a person goes beyond knowing what job they need to do and how they will be paid. A worker’s employment status can have an impact on how the working relationship will be for months and years to come.
What is the meaning of employment status?
Generally, employment status is a term that refers to the relationship between an employer and a worker. It is the status of a worker in a company based on an agreed arrangement of the type of work, duration of work, and other terms. An individual’s employment status also speaks about the different rights and other work protections that an individual is entitled to at work. Similarly, employment status is also indicative of the responsibilities of employers to workers.
Employment status in the United States typically refers to the type of implied or written employment contract that an employer offers a worker. For example, an employee may be hired as full-time, part-time, temporary, or seasonal. There are also apprenticeships and internship options.
Why is employment status important?
Employment status can be defined in Medicare regulation as either current (employed) or non-current (unemployed). It is relevant in determining whether Medicare is the primary or secondary payer of health insurance claims.
Additionally, the Internal Revenue Service (IRS) makes no definite distinction in terms of the different statuses of employment. For tax purposes, they categorize workers as employees or non-employees such as self-employed contractors. They based it on the following criteria:
Relational: there is an implied or written employment contract defining the job, benefits, wages, duration of work, and other terms of employment which establishes a link between the employer and the employee.
Financial: there are wages or salaries given in exchange for work and services performed.
Behavioral: the employer can control how the job is to be done.
Note that all of the abovementioned criteria should be met for a worker to be considered by the IRS as an employee. If a worker does not meet even one of the points, the IRS will deem the individual as a non-employee. There are a few types of non-employees like independent contractors, freelancers, and consultants.
For business owners, determining the employment status of workers is significant. The employment status does not only define what the working relationship will be between the worker and employee, but it also defines the responsibilities that the employer is accountable for.
In Canada and other countries, there are three types of employment statuses that an individual can have. These are:
Worker: this employment status is considered a more basic type or the most casual type among the three. A worker has the arrangement to perform a particular job or service to an employer. Subcontracting the work to another individual is not allowed.
Employee: an individual with this employment status has an employment contract that indicates the job description, duration, location, wages, benefits, and all other terms of employment. Employees are entitled to employment protections and rights that do not apply to workers.
Self-employed: a self-employed individual runs their own business and is primarily responsible for managing it. They are contracted by clients to render services. This employment status offers the most flexibility and freedom among the three types. However, self-employment does not give employment protection and rights.
I am a business owner and I am planning to hire workers. How can I determine the kind of employment status to set?
To help you decide the employment status that would suit your business needs, consider asking the following questions:
What is the nature of the job?
Will the job be part of a long-term plan or will it be a one-time or a short-term project?
Does the work require specialized or advanced knowledge in a certain field?
Does the business need the job to be done at a specific period or can it be done anytime?
Will you need to train an individual to do the job? How long will it take?
Is the job easy to learn?
Answering these questions can help lead you to the employment status that will suit your needs. For example, if the work needed is only for a one-time short project, hiring a freelancer or a seasonal employee may be the answer. However, if you need somebody for an ongoing and long-term role, then hiring a full-time employee would be prudent.
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