What’s the difference between a worker co-op and a producer co-op?
When a group of people forms a cooperative to work together, they have to decide whether to treat themselves as employees of the co-op or as producers that contract with the co-op to provide products or services through the co-op.
A prototypical producer co-op is made up of farmers that each work independently on their own farms. They each contract with the co-op to provide a certain amount of produce that the co-op will market for them. Patronage dividends are paid based on the amount of produce each member markets through the co-op.
Imagine a different scenario: a group of bookkeepers gets together to form a bookkeepers’ co-op. Should the co-op be a worker co-op or a producer co-op? Note that in California and in many other states, there is not a separate statute for a worker co-op versus a producer co-op. So the co-op would form under the same statute in either case. The important question is whether the bookkeepers would treat themselves as employees or independent contractors with respect to the co-op.
Co-op members will often prefer to treat themselves as independent contractors to avoid the compliance issues that come with having employees. Whether they are co-op members or not, (in most cases) employees must be paid minimum wage, have workers compensation insurance, have employment taxes withheld from their pay, etc. But co-ops should be careful about choosing this route. Before treating co-op members as independent contractors, the co-op should consider whether the members comfortably fall within the IRS’s definition of an independent contractor (for example, how much control does the co-op have over the day-to-day activities of the members? are the members free to work for others? do the members purchase their own supplies and equipment? etc.).
The IRS, as well as other regulatory bodies, is very concerned about workers being misclassified as independent contractors. The penalties for misclassification can be harsh. So do some careful thinking before treating co-op members as independent contractors!
Another thing to be aware of is that a corporate officer must always be treated as an employee and not an independent contractor. So if a co-op member is paid for serving as secretary, treasurer, or some other officer position, those payments must be treated as wages, subject to withholding of employment tax.
