Independent contractors
and Workers' Compensation
The decision to classify workers as employees or independent
contractors is a decision that has crucial consequences for both Workers’
Compensation and taxes. Even the unintentional misclassification of an employee
as an independent contractor can result in a myriad of consequences including
liability for injuries suffered by employees when Workers’ Compensation
insurance is not secured and payroll tax liabilities.
The amount of control exercised over the worker is the principal determining
factor as to whether the worker is an employee or independent contractor.
The IRS formerly used what has become known as the "Twenty Factor"
test. Under pressure from Congress and from representatives of labor and
business, it consolidated the twenty factors into eleven main tests, and
organized them into three main groups: behavioral control, financial control,
and the type of relationship of the parties. Those factors appear below,
along with comments regarding each one (source: IRS Publication 15-A, 2007
Edition)
Behavioral control
Facts that show whether the business has a right to direct and control how
the worker does the task for which the worker is hired including the type
and degree of:
1. Instructions the business gives the worker.
An employee is generally subject to the business' instructions about when,
where, and how to work. All of the following are examples of types of instructions
about how to do work:
• When and where to do the work
•
What tools or equipment to use
•
What workers to hire or to assist with the
work
•
Where to purchase supplies and services
•
What work must be performed by a specified
individual
•
What order or sequence to follow
The amount of instruction needed varies among different jobs. Even if no
instructions are given, sufficient behavioral control may exist if the employer
has the right to control how the work results are achieved. A business may
lack the knowledge to instruct some highly specialized professionals; in
other cases, the task may require little or no instruction. The key consideration
is whether the business has retained the right to control the details of
a worker's performance or instead has given up that right.
2. Training the business gives the worker. An
employee may be trained to perform services in a particular manner. Independent
contractors ordinarily use their own methods.
Financial control
Facts that show whether the business has a right to control the business
aspects of the worker's job include:
3. The extent to which the worker has unreimbursed
business expenses. Independent contractors are more likely to have
unreimbursed expenses than are employees. Fixed ongoing costs that are incurred
regardless of whether work is currently being performed are especially important.
However, employees may also incur unreimbursed expenses in connection with
the services they perform for their business.
4. The extent of the worker's investment. An employee
usually has no investment in the work other than his or her own time. An
independent contractor often has a significant investment in the facilities
he or she uses in performing services for someone else. However, a significant
investment is not necessary for independent contractor status.
5. The extent to which the worker makes services available
to the relevant market. An independent contractor is generally free
to seek out business opportunities. Independent contractors often advertise,
maintain a visible business location, and are available to work in the relevant
market.
6. How the business pays the worker. An employee
is generally guaranteed a regular wage amount for an hourly, weekly, or
other period of time. This usually indicates that a worker is an employee,
even when a commission supplements the wage or salary. An independent contractor
is usually paid by a flat fee for the job. However, it is common in some
professions, such as law, to pay independent contractors hourly.
7. The extent to which the worker can realize a profit
or loss. Since an employer usually provides employees a workplace,
tools, materials, equipment, and supplies needed for the work, and generally
pays the costs of doing business, employees do not have an opportunity to
make a profit or loss. An independent contractor can make a profit or loss.
Type of relationship
Facts that show the parties' type of relationship include:
8. Written contracts describing the relationship the
parties intended to create.
9. Whether the business provides the worker with employee-type
benefits, such as insurance, a pension plan, vacation pay, or sick pay.
10. The permanency of the relationship. If the company
engages a worker with the expectation that the relationship will continue
indefinitely, rather than for a specific project or period, this is generally
considered evidence that the intent was to create an employer-employee relationship.
11. The extent to which services performed by the worker
are a key aspect of the regular business of the company. If a worker
provides services that are a key aspect of the company's regular business
activity, it is more likely that the company will have the right to direct
and control his or her activities. For example, if a law firm hires an attorney,
it is likely that it will present the attorney's work as its own and would
have the right to control or direct that work. This would indicate an employer-employee
relationship.
Do not underestimate the difficulty of applying these standards to specific
individuals performing services. In doubtful cases, always seek expert advice.
It is also important to become familiar with state statutes, as some may
be more or less restrictive in their definition. |