Employers who call their workers “independent contractors” merely to avoid unemployment, workers compensation insurance, and federal and state tax withholding etc. are headed for serious trouble with the Department of Labor (DOL) and/or the Internal Revenue Service (IRS).
The IRS announced in May of 2007 that worker classification cases would be a major area of emphasis in 2008. In March of this year the DOL investigated a Texas water company and found that over 200 employees had been incorrect misclassified as independent contractors. The company ended up owing nearly $600,000 for two years of missed overtime pay. The IRS recently delivered FedEx a $319M tax hit due to classification issues.
Is my worker an employee or independent contractor?
Ask these questions:
Do you tell the employee when and where to report to work?
Is the employee given instructions on how the work is to be performed?
Is the work supervised by anyone on your staff?
Is the employee covered by any of your fringe benefit plans?
Have you issued the employee a company ID card?
Are you providing business cards, stationery or other company property?
If yes to the above, the worker more than likely is an employee, not an independent contractor.
Check the IRS 20 Factor Test for Determining whether the worker is an employee or independent contractor. Go to: www.comptroller.ilstu.edu/downloads/20–factor–test-for-independent–contractors.pdf
The IRS has recently moved away from the 20 factor test, and regrouped the analysis into three broad characteristics: Behavioral Control, Financial Control and Type of relationship. The 20 factors do help to shed light on the big picture, though some of them wind up being insignificant in comparison to others. Instead of getting stuck on all of the small details, it is more important to look at the big picture.
Is the employer controlling the behavior of this worker? Are they limiting the worker’s risk for profit or loss and other clients? Does the worker appear to be a vital part of the employer’s organization? These questions will help to see the big picture instead of getting hung up on minute details. A strong YES to any of the three will certainly undermine the potential for a valid independent contractor relationship.
Due to the industry we are in we have to use some independent contractors. We do however have several members of staff who are full time. As we expand and take on new contracts we do try to get more workers on as full time members of staff.