We have an employee who has a side business of fixing copiers and printers after hours and on weekends, which in the past has not interfered at all with his day-to-day job duties. We are currently taking bids for this business and the employee wants to bid for this after hours and weekend job. This type of repair work is not part of his normal job duties and is considered a separate function. Do we have any potential problems with this type of arrangement?

Ann Kiernan replies:

I see a number of potential problems with this arrangement. First of all, there might be a violation of your organization's conflict of interest policy. And if you work for a government entity, the law in some states forbids side contracts with state employees and/or their businesses.

Second, if your employee's repair business is not incorporated, there could be major tax issues. IRS regulations usually require that if 50% or more of the work performed in the pay period is "employment," then the individual must be paid as an employee for all of the services performed in that pay period (including withholding taxes)

Then there's the question of whether the employee is really acting as an independent contractor when doing his repair work. IRS Publication 15A lists the series of factors the IRS uses to make that decision. Fundamentally, it comes down to whether, under the specific facts of your situation, your company has the right to direct and control how he does the repair work. If you treat him as an independent contractor, but the IRS says he's an employee, that misclassification will make the company liable for failure to withhold income and unemployment taxes, including Social Security and Medicare contributions, plus interest and penalties. Workers' compensation premiums would have to be paid, as well, and you might be liable for unpaid overtime if he worked more than 40 hours in a week in the two jobs.

So the short answer is, don't do it! But if you want to do it, contact a local attorney to make sure you do it right.