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Employee or independent contractor - IRS, DOL, Florida


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Are your workers employees or independent contractors? Are you sure? Misclassification of an employee as an independent contractor could cost your company. If you deliberately misclassify, you could go to prison.

This presentation from the Taft Street Law Firm showcases the different totality of the circumstance common law control tests that the IRS, Department of Labor, and State of Florida use to determine whether a worker is an employee or an independent contractor.

If you are unsure whether you are following best business practices, contact a Virtual Corporate Counsel℠ at Taft Street.

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Employee or independent contractor - IRS, DOL, Florida

  1. 1. 1
  2. 2. — Charles J. Esposito, Esq. Taft Street Law Firm 2
  3. 3. The IRS, DOL, and State of Florida all have their own totality of the circumstances tests for determining if a worker is an employee or independent contractor. Each test looks to the degree of control the employer has in the business relationship. 3
  4. 4. Common Law Rules 3 Categories 1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? 2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) 3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? IRS
  5. 5. Common Law Rules 20 Factors • Businesses must weigh all these factors • Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor • There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor • No one factor stands alone in making this determination • Factors which are relevant in one situation may not be relevant in another IRS The Keys • Look at the entire relationship • Consider the degree or extent of the right to direct and control • Document each of the factors used in coming up with the determination
  6. 6. A worker who is required to comply with other persons' instructions about when, where, and how he or she is to work is ordinarily an employee. Training a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other methods, indicates that the employer is directing the work. Integration of the worker's services into the business operations generally shows that the worker is subject to direction and control. Does the business rely on these services? IRS Factors 1-5 6 If the employer insists that services must be rendered by the worker, presumably the employer is asserting control over the worker. If the employer hires, supervises, and pays assistants, that factor generally shows control over the workers on the job. If the worker hires, fires, and supervises, then this factor indicates independent contractor status.
  7. 7. A continuous relationship between an employer and a worker indicates a possible employment relationship. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential projects. (see US v. Silk) The establishment of set hours of work by the employer is a factor indicating control over the worker. Full time work gives the employer control over the worker’s time. An independent contractor, on the other hand, is free to work when and for whom he or she chooses. 7 If the work is performed on the premises of the employer, that factor suggests control over the worker, especially if the work could be done elsewhere. Telecommuting and traveling, however, do not automatically indicate contractor status. If a worker must perform services in the order or sequence set by the employer, that factor shows that the worker is not free to follow the worker's own pattern of work. It is sufficient to show the employer retains this right if they have not exercised it. IRS Factors 6-10
  8. 8. A requirement that the worker submit regular or written reports to the employer indicates a degree of control. Generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor. The fact that the employer furnishes significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship. 8 If the employer pays and the controls the worker's business and/or traveling expenses, the worker is ordinarily an employee. Independent contractors invest in their own facilities. Employees rely on employer investment in facilities. IRS Factors 11-15
  9. 9. A worker who can realize a profit or suffer a loss as a result of the worker's services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee. If a worker performs more than de minimis services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor. However, a worker can be an employee of multiple employers. The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal. 9 The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship. If the worker has the right to end his or her relationship with the employer at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship. IRS Factors 16-20
  10. 10. 10 IRS Common Law Rules 20 Factors 1 2 3 4 5 6 9 107 8 11 12 13 14 15 16 17 18 19 20
  11. 11. Economic Reality Test Fair Labor Standards Act • In order for the FLSA’s minimum wage and overtime provisions to apply to a worker, the worker must be an “employee” of the employer • The FLSA defines “employ” as including to “suffer or permit to work” • Broad definition • Workers who are economically dependent on the business of the employer, regardless of skill level, are considered to be employees, and most workers are employees. • Independent contractors are workers with economic independence who are in business for themselves. DOL
  12. 12. Economic Reality Test 6 Factors • “Economic realities” factors are helpful guides in resolving whether a worker is truly in business for himself or herself. • Employers can require (or allow) employees to work and who can prevent employees from working. • The Supreme Court has indicated that there is no single rule or test for determining whether an individual is an employee or independent contractor for purposes of the FLSA. • The Court has held that the totality of the working relationship is determinative, meaning that all facts relevant to the relationship between the worker and the employer must be considered. DOL
  13. 13. If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer and less likely that the worker is in business for himself or herself. For example, work is integral to the employer’s business if it is a part of its production process or if it is a service that the employer is in business to provide. 13 DOL Factors 1-3 Managerial skill may be indicated by the hiring and supervision of workers or by investment in equipment. Analysis of this factor should focus on whether the worker exercises managerial skills and, if so, whether those skills affect that worker’s opportunity for both profit and loss. The worker must make some investment compared to the employer’s investment (and bear some risk for a loss) in order for there to be an indication that he/she is an independent contractor in business for himself or herself. A worker’s investment in tools and equipment to perform the work does not necessarily indicate independent contractor status, because such tools and equipment may simply be required to perform the work for the employer. If a worker’s business investment compares favorably enough to the employer’s that they appear to be sharing risk of loss, this factor indicates that the worker may be an independent contractor.
  14. 14. Both employees and independent contractors may be skilled workers. To indicate possible independent contractor status, the worker’s skills should demonstrate that he or she exercises independent business judgment. Further, the fact that a worker is in open market competition with others would suggest independent contractor status. 14 DOL Factors 4-6 Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee, as opposed to an independent contractor. However, a worker’s lack of a permanent relationship with the employer does not necessarily suggest independent contractor status because the impermanent relationship may be due to industry-specific factors, or the fact that an employer routinely uses staffing agencies. Analysis of this factor includes who sets pay amounts and work hours and who determines how the work is performed, as well as whether the worker is free to work for others and hire helpers. An independent contractor generally works free from control by the employer (or anyone else, including the employer’s clients). This is a complex factor that warrants careful review because both employees and independent contractors can have work situations that include minimal control by the employer. However, this factor does not hold any greater weight than the other factors.
  15. 15. Florida Control Test 10 Common Law Factors • Chapter 443, Florida Statutes, governs whether services performed constitute employment subject to the Florida Reemployment Assistance Program Law. • This law provides that employment includes service performed by individuals under the usual common law rules applicable in determining an employer- employee relationship. • The common law rules look primarily at the following 10 factors of the working relationship to determine if the worker is an employee or an independent contractor. FL
  16. 16. • If the employer retains the right to dictate how the work should be done, the worker is an employee. • If the employer decides what work the worker will do and how the worker will do it, then the worker is an employee. • When an employer hires an independent contractor, the employer is normally interested only in the end result, not the details of how the contractor performs the work. • An independent contractor is not subject to the will and control of the employer. • The employer can decide what results are expected from the independent contractor, but cannot control the methods used to accomplish those results. • This factor is the most important of the 10 determining factors. 16 FLORIDA Factor 1
  17. 17. A person engaged in a distinct occupation or business is more likely to be an independent contractor if the occupation or business is separate and distinct from the employer's business. 17 FLORIDA Factors 2-4 If the work is usually done in that locality under the direction of an employer, then the worker is more likely to be an employee. If the work in that locality is usually done by a specialist without supervision, then the worker is more likely to be an independent contractor. The greater the skill required for the occupation, the more likely the worker is an independent contractor. A contract for labor only will normally be considered a contract of employment while the hiring of a licensed professional is more likely to be considered the hiring of an independent contractor.
  18. 18. Independent contractors are generally expected to provide or purchase everything they need to do the job. Employees are not expected to provide their own workplace, materials, tools, and supplies, or to otherwise invest their own money in the business. 18 FLORIDA Factors 5-7 The more long-term, continuous, and exclusive the relationship is, the more likely it is to be employment. Independent contractors generally perform their work one job at a time and are paid by the job. An employee is paid for his time.
  19. 19. If there is a written agreement between the parties describing the relationship it should be honored unless other provisions of the agreement, or the actual practice of the parties, show that the agreement is not a valid description of the working relationship. If the actual practice of the parties shows an employee relationship, an agreement which describes the worker as an independent contractor will be disregarded. How the worker is treated, not the language of a written agreement or the issuance of a 1099, determines whether the worker is an employee or an independent contractor. 19 FLORIDA Factors 8-10 If the hiring party is a business, it is more likely that the worker is an employee. If the hiring party is an individual, the worker is more likely to be an independent contractor. If the service provided by the worker is an integral part of the service the employer provides to the public, the worker is more likely to be an employee. If certain services are so essential to a business that it will succeed or fail based upon how well those services are performed, the business will often want to exercise enough control over the services to ensure they are good. That can make a business the employer of such workers.
  20. 20. That’s who cares. Who Cares?
  21. 21. 21 21 # Misclassification Leads to Liability Wage and Hour Employment Tax Employee Benefits Worker’s Compensation
  22. 22. 22 EXTENSIVE #
  23. 23. # 23 IRS • $50 each missing W2 • 100% of Unpaid Employer FICA Taxes • 40% of FICA Taxes Not Withheld • 1.5% of Wages Penalty • .5% of Unpaid Monthly Tax Criminal Penalties For Intentional Misclassification • $1000 Each Misclassified Worker • 1 Year in Prison • Potential for Personal Liability
  24. 24. 24 # PROACTION How Can Your Company Protect Itself? Virtual Corporate CounselSM Best HR Practices Informed Contractor Contract Drafting Risk Management Proper Insurance
  25. 25. 25 CONTRACT Be explicit in defining contractor relationship TOOLS AND MATERIALS Don’t provide them COMPENSATION Pay by the job, not by time periods RESULTS Focus on results of the work, not the process CONTROL Allow contractors freedom, after all they have to honor your contractual agreement #
  26. 26. Worker misclassifications are costly, but avoidable Review and assess your worker classifications Implement changes to your hiring and employment practices to manage risk 26
  27. 27. “ 27 — Gary Cohn If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business.
  28. 28. Vir tual Corp orate CounselS M 28