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Employees vs. Independent Contractors - James Irving

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James Irving presented on the differences of classifying an employee as an employee, independent contractor or intern and why it matters. He also provided guidance on what employers should to reduce the risks associated with misclassification.

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Employees vs. Independent Contractors - James Irving

  1. 1. EMPLOYEES vs. INDEPENDENT CONTRACTORS October 9, 2013 James V. Irving Bean, Kinney & Korman, P.C. 2300 Wilson Boulevard, 7th Floor Arlington, VA 22201 (703) 525-4000 www.beankinney.com
  2. 2. James V. Irving Shareholder at Bean, Kinney & Korman, P.C.  Practice Area Focus – Business, Corporate, Employment & Litigation  25 years as a practicing attorney  Education - College of William & Mary, Marshall-Wythe School of Law, J.D.  Bar Admissions – Virginia, Maryland, District of Columbia and Massachusetts 2
  3. 3. Overview  Worker Designations 1. 2. 3. Employee Independent Contractor Intern  Why It Matters  Risks of Mischaracterization  Prudent Practices 3
  4. 4. Worker Designations Independent Contractors and Employees are Separate and Distinct animals! 4
  5. 5. Who is an Employee? The designation of an employee can be clearly defined using:  Court The “Silk” Factors  Internal Revenue Service Benchmarks 5
  6. 6. Supreme Court on Tax Status  United States v. Silk  Opinion issued June 16, 1947 6
  7. 7. The Silk Factors       Degree of Control Profit or Loss Opportunities Investment Degree of Skill Permanence Integral Part of Business 7
  8. 8. IRS Benchmarks        Degree of professional control Staffing Degree of independence Type of service Flexibility/control of hours Right to fire/quit Financial concerns 8
  9. 9. Professional Control:  An employee is told what to do, when to do it and generally uses company tools and resources to perform the job.  An independent contractor is charged with completing a task and is responsible for results. He/she provides his/her own tools, equipment and facilities. How the task is completed is a determination of the independent contractor. 9
  10. 10. Staffing:  Employees are assisted by other company employees at the express or implicit direction of the business owner.  Contractors provide their own assistants (often sub-contractors) at their own cost. 10
  11. 11. Independence:  An employee works solely for his or her employer.  Independent contractors make their services available to the general public. They can and do accept multiple tasks from multiple businesses. 11
  12. 12. Services Performed:  In the employer-employee relationship, the worker provides personal service to the company.  An independent contractor may hire, supervise and pay his/her own staff or assistants in order to accomplish the work of which the contractor has been tasked. 12
  13. 13. Hours:  An employee often has work hours established by the employer and may be required to work or be available on a full-time basis.  An independent contractor generally works when he/she wishes, provided the project is properly completed. 13
  14. 14. Right to Fire / Right to Quit:  An employee may quit at any time without incurring liability and an employer may fire an employee.  An independent contractor must complete the contract satisfactorily or may be liable for breach of that contract. Likewise, he/she cannot be fired as long as he/she produces the required results. 14
  15. 15. Financial Concerns:  An employee is generally paid at regular intervals, such as by the hour, week, or month. An employee gets a W-2 statement reflecting payments received in a calendar year.  An independent contractor can make a profit or suffer a loss, based upon his/her own business decisions. Contractors are issued 1099 Forms and file business tax returns. 15
  16. 16. Special Case: The Intern The U.S. Department of Labor (DOL) has a six-factor test to determine if the intern should be treated and classified as an employee, who must be paid. 16
  17. 17. Factor # 1  The internship, even though it includes actual operation at the facilities of the employer, is similar to training which would be given in an educational environment. 17
  18. 18. Factor # 2  The internship experience is for the benefit of the intern. 18
  19. 19. Factor # 3  The intern does not displace regular employees, but works under close supervision of existing staff. 19
  20. 20. Factor # 4  The employer that provides the training derives no immediate advantage from the activities of the intern and, on occasion, its operations may actually be impeded. 20
  21. 21. Factor # 5  The intern is not necessarily entitled to a job at the conclusion of the internship. 21
  22. 22. Factor # 6  The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship. 22
  23. 23. Household Employee  Control over work product  Hours according to your schedule  Payment for services determined by you 23
  24. 24. Examples of Household Workers include: Babysitters Caretakers Maids Drivers Health Aides Nannies Private Nurses Housekeepers Gardeners House cleaning workers 24
  25. 25. When Household Employees are NOT Your Employee  The work is not done in your home  The worker was hired through an agency  You do not provide any tools for the work to be performed 25
  26. 26. Why It Matters The IRS has recently made the mischaracterization of employment status a focus of attention. President Obama’s 2011 fiscal budget allocated significant resources to joint IRS – Department of Labor efforts to investigate and penalize employer mischaracterization. 26
  27. 27. Who Cares? The IRS cares because, in cases of mischaracterization, they lose payroll taxes and related revenue. 27
  28. 28. What’s the Risk? To the Employer – the risk is ENORMOUS! 28
  29. 29. Possible Damages:  Unpaid wages plus damages.  Attorneys’ Fees.  Penalties imposed by the IRS and State taxing authorities. 29
  30. 30. Prudent Practices:  Memorialize working relationship in an appropriate contract.  Maintain appropriate professional distinction among personnel.  Don’t offer benefits, company credit cards or the use of company computers to contractors.  Don’t ask contractors to sign non-competition agreements. 30
  31. 31. continued….  Don’t allow contractors to hold themselves out to the public as employees (such as through the use of business cards).  Maintain clear business records which include copies of the independent contractor’s contract, IRS Form W-9 (request for taxpayer ID number) and copies of professional license(s). 31
  32. 32. Summary  Understand the needs of your business.  Hire employees, people you will control to do the work you need.  Determine when/if you have a need for an independent contractor and be sure to let him/her be free to complete the task for which you contracted. 32
  33. 33. Bean, Kinney & Korman, P.C.  Founded in 1959 in Arlington, Virginia  One of Northern Virginia’s largest and most trusted law firms  More than 37 lawyers; comprehensive array of practice areas  Nine LEED Accredited Professionals  Serve clients throughout Virginia, Maryland and D.C.  Regularly appear in all Federal and State Courts in the D.C. metro area 33
  34. 34. James V. Irving, Esquire Bean, Kinney & Korman, P.C. 2300 Wilson Boulevard, 7th Floor Arlington, Va. 22201 703-525-4000, extension 280 jirving@beankinney.com www.beankinney.com 34

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