The question of whether a worker is an employee or independent contractor has always been one of the more popular questions employers ask.
In the post-COVID era of remote workers and the gig economy, it has become an even more pressing concern. The most important piece of information on this topic is this: It is not an arbitrary decision. The determination of whether a worker is an employee, or an independent contractor (IC), is based on common law rules and not on the preference of the individuals involved.
Since misclassification of workers can subject employers to substantial penalties and past taxes, it is important to get it right. Various state initiatives, in addition to ongoing efforts by the Internal Revenue Service (IRS), have increased in response to the worker misclassifications that became apparent during COVID unemployment.
There are three characteristics the IRS uses to determine working relationships. Here is what you need to know to make sure you are classifying your workers properly:
- Behavioral control – Facts that show WHO has the right to direct or control HOW the work is done. This can be shown through instructions, training, or other means.
- Financial control – Facts that show WHO has a right to direct or control the FINANCIAL aspects of the worker’s activities.
- Type of relationship – Facts dealing with HOW the workers and employers perceive their relationship. This can be shown through written contracts, provision of benefits, termination practices, etc.
Let’s examine how these three factors come into play when comparing an employee to an independent contractor.
Behavioral Control
Employee:
The employer controls not only WHAT is to be done but also WHEN and HOW. The need for specialized training to perform services in a particular manner also indicates employee status.
Independent Contractor:
The employer only controls the RESULT of the work and not the MEANS or METHOD of accomplishing the result, (Think of hiring a landscaper to maintain grounds)
Financial Control
Employee:
The employer sets the rate of pay, determines the method of payment, and generally reimburses the employee for business expenses.
Independent Contractor:
The IC determines the cost and payment schedule and incurs unreimbursed business expenses. The IC can realize a profit or loss and make r services available to others within the market.
Type of Relationship
Employee:
Employees may have a written employment contract. The employer provides employee-type benefits such as insurance, pension plan, vacation, or sick pay. The permanency of the relationship is not specific as employees are generally hired to work indefinitely.
Independent Contractor:
Independent contractors generally have contracts per job or for a specific length of time. ICs do not receive employee benefits. Independent contractors are free to work elsewhere at any time.
While these are the three main factors in deciding whether a worker is an employee or an independent contractor, additional special facts or circumstances may come into play as well.
Always consult an employment lawyer if there is any doubt about which classification is appropriate. Take the time to correctly classify workers before they perform services to avoid potential problems down the road.
The key is to look at the entire relationship, consider the extent to which each has the right to direct or control, and, as always, document the factors used in deciding the proper classification.
If you have any questions, please reach out to the SobelCo CAAS Department for more information.
