According to the South Dakota Reemployment Department, contract labor is the most misused category of workers. It can be confusing for many employers to determine if a worker is an employee or an independent contractor. In this article, we will look at the distinctions between employees and independent contractors.

How does the State of South Dakota determine an independent contractor?

South Dakota Codified Law 61-1-11 states that an independent contractor must meet both of the following:

  1. The worker must be free from control or direction of the performance of the contract for services by the employer.

AND

  • The worker must have their own independently established trade, occupation, or business.

The Reemployment Assistance Tax Unit mentions the following additional criteria that is more specific to an independent contractor:

  1. They realize a profit or loss based on how well they perform their job.
  2. They choose when and for whom they will work.
  3. They provide their own supplies and equipment.
  4. They have a significant investment in the equipment they use or facility they use for performing the work.
  5. They make their services available to the public.

What determines an employee?

The Reemployment Assistance Tax Unit mentions the following criteria that indicates a person is considered an employee:

  1. They are insulated from loss and restricted in the amount of gain.
  2. They are hired for an ongoing period which may be part-time, full-time, or temporary.
  3. They follow instructions given to them by the employer on how to do their job.
  4. The employer trains them.
  5. The employer sets their hours.
  6. They work on a regular basis.
  7. The employer provides the equipment and supplies.
  8. They do not have a business of their own.

What categorizes a day- or casual-laborer?

The state of South Dakota requires them to be reported as employees, even though they are only working for a short time. These laborers are told when they will work and how long they will work for, so they fall under an employee and are covered by South Dakota Reemployment Coverage.

Even if you have a contract-labor agreement with a worker, this does not guarantee that the worker will be treated as an independent contractor. According to South Dakota law, a worker cannot sign away their right to Reemployment Assistance. For the worker to be treated as an independent contractor, they must meet the independent contractor criteria.

It is important that you make the correct determination when classifying a worker as an employee or independent contractor. If you misclassify a worker as an independent contractor when the State of South Dakota determines them to be an employee, you may be subject to back taxes, penalties, and interest.

If in doubt as to how to classify a worker, reach out to one of the professionals here at KT, or call the South Dakota Reemployment office (605-626-2312) to request a written determination.