This presentation reviews: which factors the IRS uses to determine common law employee status | how does this affect compliance with ACA | what penalties may apply.

3. Introduction
• Worker Classification: Employers' obligations under many
federal and state employment and tax laws can vary depending
on whether workers are classified as employees or independent
contractors within the meaning of the particular law.
• Reasons to Use Independent Contractors: Many employers
find it necessary or advantageous to use independent contractors
for some types of work.
In many cases, using independent contractors can be less costly
and more flexible than hiring employees to perform the same
work.
• Penalties for Misclassification: Under various laws, employers
can face severe penalties for classifying workers as independent
contractors, when they actually are employees within the definition
of the particular law.

4. Introduction
• Classification Tests: While different laws may require employers
to use different tests to classify workers as employees or
independent contractors, most laws base such determinations on
a “right to control” test.
Essentially, under the right to control test, an employer-employee
relationship exists when the employer has the right to control and
direct the worker.

5. Why does it matter?
• IRS
 More difficult to collect income taxes from independent contractors
 Employer Mandate and Reporting penalties
• HHS
 More difficult to collect payroll taxes from independent contractors
• Department of Labor
 Potential abuse of minimum wage and overtime laws
 Potential abuse of anti-discrimination laws

6. Why does it matter?
• Department Revenue of a State
 More difficult to collect income taxes from independent contractors
• Unemployment Agency of a State
 Employers are not contributing to the UI fund
• Workers Compensation Agency of a State
 Workers are not protected
 Employers are not contributing to the WC fund

7. Risks Associated with
Employee Misclassification
Penalties
• Government fines
• Payment of employment taxes
 100% of FICA contribution
 Employer may not collect employee amount from misclassified worker
 Employer mandate
 Reporting

8. Who is an independent contractor?
Each governmental unit and/or agency uses its own analysis to
determine if a worker is an “independent contractor”
No unit/agency has a precise definition – the totality of the
circumstances must be analyzed.

9. IRS Test
The IRS looks at the degree of control the employer exerts over the
worker and the degree of independence exhibited by the worker.
The IRS considers facts that provide evidence in the following three
categories:
• Behavioral Control
• Financial Control
• Type of Relationship

10. Behavioral Control
• Control over when and where the work will be done
• Whether or not the employer provides instruction on how the work
will be done
• Whether the worker uses the employer’s or his/her own tools and
equipment
• Whether or not the employer provides training to the worker
• How the worker is evaluated (details or end result)

11. Financial Control
• Extent of unreimbursed business expenses
• Extent of worker’s investment in equipment and facilities
• Extent to which the worker’s services are made available to the
relevant market
• Extent to which the worker can realize a profit or loss
• Method of payment

12. Type of Relationship
• Whether or not the employer provides the worker with employee-
type benefits
 Insurance
 Pension plan
 Vacation, holiday, or sick pay
• Whether or not the worker is provided a copy of the employee
handbook
• Whether or not the worker is engaged with the expectation that
the relationship will continue indefinitely
• The extent to which the worker’s services are a key aspect of the
employer’s regular business

13. Fair Labor and Worker Classification
• The Fair Labor Standards Act (FLSA), which governs overtime
pay and minimum wages, uses a broader definition than the
common law control test to define whether an individual is an
employee or an independent contractor.
• Generally, employee status for FLSA purposes is determined by
an “economic reality test,” developed by the courts.
• Employers who misclassify employees as independent
contractors can be liable for unpaid minimum wages or overtime
as well as liquidated damages and attorneys' fees.

14. Fair Labor and Worker Classification
• The economic reality test requires an employer to examine whether a worker is
economically dependent on the employer's business.
• Commonly used factors to determine the status of workers under the economic
reality test include:
 the extent to which the worker has the right to control the result of the work and the manner
in which the work is performed;
 the degree to which the individual is “economically dependent” on the employer's business
or, in other words, the amount of control the employer has over the individual's opportunity
to realize a profit or sustain a loss;
 the extent to which the services are an integral part of the employer's business operations;
 the amount of initiative or level of skill required for the worker to perform the job;
 the permanency, exclusivity, or duration of the relationship between the employer and the
worker; and
 the extent of the worker's investment in equipment or materials required for the job.
• No single factor is necessarily controlling or decisive in determining whether an
individual qualifies as an employee under FLSA.

15. Employment Status Under Other Laws
• Workers' compensation laws do differ from other laws, in that it
may be more advantageous for an employer to classify its workers
as employees, because if a worker is injured on the job and is
covered by the statute, he or she is prevented from suing the
employer in tort law and their only method of recovery is under
workers' compensation.
• In general, Title VII and ADA give the same definition of the term
employee: “any individual employed by an employer.”
• In applying this definition in Title VII cases, the courts and the
Equal Employment Opportunity Commission (EEOC) have used
the common law control test to determine employee status.

16. US Supreme Court
In resolving disputes under the Fair Labor Standards Act, the US
Supreme Court has said that no single factor is determinative, but
depends upon the whole activity.
The factors the Court has considered significant include:
• The extent to which the worker’s services are an integral part of
the employer’s business
• The permanency of the relationship

17. US Supreme Court
• The amount of the worker’s investment in facilities and equipment
• The nature and degree of control by the principal
• The worker’s opportunities for profit and loss
• The level of skill require in performing the job and the amount of
initiative, judgment, or foresight in open market competition with
others required for the success of the claimed independent
enterprise

18. Treated as an Employee
• How you treat a worker is part of the total picture in determining
his/her classification as an employee or independent contractor.
• Did you give the worker an employee handbook?
• Did you give the worker some employee benefits? (paid sick
days, access to EAP or reduced membership to gym?)
• Did you evaluate the worker using the same forms as are used for
employees?

19. Use of Temporary Employees
• Employment agencies hire, fire and pay the workers.
• Employment agencies are responsible for withholding income and
payroll taxes, paying the employer’s portion of FICA, and possibly
providing fringe benefits to the workers.
• The contracting company pays the agency with a vendor check.
• So what could go wrong?

20. Use of Temporary Employees
• Employers are still required to comply with several Federal and
state employment laws.
• Poorly drafted agreements with staffing agencies may leave an
employer on the hook to pay for an agency’s mistake.
• Temporary employees may inadvertently be affected by benefit
plans and policies.
• Temporary employees may have access to confidential
information in performing their temporary job.

21. Use of Joint Employers
A contracting company may be considered a “joint employer”
depending upon the amount of control it exercises over the worker
during the term of the assignment.
A determination is made by looking at the entire relationship.

22. Joint Employers
Factors to consider in determining if there is a joint employment
relationship include:
• The nature and degree of control over the worker
• The degree of supervision exercised over the work
• The furnishing of work space and/or equipment
• The power each has to determine the pay rates or method of
payment
• The right each has to hire, fire or modify working conditions

23. Liability of Joint Employer
• Anti-discrimination
 May be liable for discriminatory treatment or hostile work environment
• FMLA
 Leased employees who work for a full workweek are counted toward
the 50 minimum for FMLA coverage
 Agency responsible for notices
 Contracting employer may be responsible for accepting a leased
worker returning from FMLA leave

24. Liability of Joint Employer
• FLSA
 Both employers are liable for minimum wage and overtime
requirements
• NLRA
 Temporary employees from an agency may be included in a bargaining
unit if they share a “community of interests”
 Both employers may be held liable in an unfair labor practice
• OSHA
 Leasing employer will likely be liable for work-related injuries

25. Best Practices When Leasing Employees
• Seek an indemnity agreement in the contract with the staffing
agency so that the agency retains liability for employment-related
claims and agrees to indemnify the client for any losses they may
incur attributable to the actions of the agency
• Contract should include a provision making the agency
responsible for payment of all employment taxes

26. Best Practices When Leasing Employees
• Employers should verify that the employees are covered under
the agency’s workers’ compensation policy.
• Employers should accommodate the needs of a worker with a
disability, unless it would be an undue hardship.
• Employers should ensure that leased workers are not subjected to
discriminatory treatment or harassment.
• Employers should review their policies and benefit plans to ensure
that leased employees are not eligible for company benefits.

27. ACA Concerns
Determination of employment status could:
• Affect the employer’s status as an
Applicable large employer.
• Make the employer subject to the $2000 penalty if 95% of full-time
employees are not offered coverage in 2016
• Make the employer subject to the $3000 penalty if the employer
does not offer coverage
• Make the employer to the reporting penalty if individual is not
provided a Form 1095-C

28. IRS Voluntary Classification Settlement Program
Eligibility
• Are currently treating the workers as non-employees
• Have satisfied Form 1099 requirements for the workers for the
past 3 years
• Have no current dispute with the IRS or the DOL regarding the
workers’ status
• Have not been previously audited by the IRS or if so, have
complied with the results of the previous audit.

29. IRS Voluntary Classification Settlement Program
Requirements
• Employer agrees to prospectively treat the workers as employees
in the future
• Employer agrees to extend the period of limitations on
assessment of employment taxes for 3 years beginning after the
date of the agreement

30. IRS Voluntary Classification Settlement Program
Benefits
• Employer will pay 10% of employment tax liability that may have
been due on compensation paid to workers for the most recent tax
year
• No interest or penalties on the liability

31. • Review all relationships with independent contractors and their
duties under the guidelines for all agencies (IRS, DOL, State)
• Review all contracts/agreements with leasing agencies
• Review all contracts/employment agreements with individual
independent contractors
DO’s

32. DONT’s
• Treat independent contractors as employees
• Automatically refuse to address ADA accommodation requests by
independent contractors
• Provide assess to all of the employer’s facilities
• Provide coverage for health or pension benefits

33. Questions?

34. Contact
Larry Grudzien
Phone(708) 717-9638
Email larry@larrygrudzien.com
Site www.larrygrudzien.com