GROWTH Business Information Series
A monthly informational series to learn key aspects of business ownership hosted by the HEB Chamber GROWTH Goal Team
Hiring Workers as Employees or Independent Contractors
Presented by:
Susan Looney
Insight HR Strategies
White Paper: Complying With Regulations Regarding Temporary Workersss
The use of temporary workers is growing in the United States, now representing 22% of the total workforce. Temporary workers are referred to as freelancers, non-employees, indirect workers, agency contractors, consultants, interns, independent contractors, and many other terms.
This document discusses the differences between classifying workers as employees versus independent contractors. Classifying workers incorrectly can result in IRS penalties and fines. The IRS uses several factors to determine proper classification, focusing on behavioral control, financial control, and the relationship between the parties. Intentionally misclassifying workers as independent contractors when they are really employees carries greater risks of penalties than unintentional misclassification. It is safest to classify ambiguous workers as employees or seek professional advice.
Independent contractor or common law employee 2013lukem
The document discusses the differences between independent contractors and common law employees and the issues around misclassifying workers. It notes that the IRS estimates that 80% of contractors are misclassified as independent when they are actually employees. Misclassification can trigger audits and penalties for businesses. The document outlines the IRS 20-factor test and states' ABC tests to determine proper worker classification. It also discusses Section 530 relief from penalties for past misclassifications if certain conditions are met.
This document summarizes an independent contractor and employee classification presentation given by Christina M. Jepson of Parsons Behle & Latimer. It discusses why proper classification is important, different tests used to determine classification including the economic realities test and common law tests, consequences of misclassification, benefits of using independent contractors, best practices, and recent cases and legislation around gig workers. The presentation provides an overview of the complex legal analysis required to properly classify workers as employees or independent contractors.
This document discusses various types of contingent worker arrangements and the legal standards for determining employment relationships. It notes that misclassifying employees as independent contractors can result in back taxes, penalties, and litigation costs. The key tests for determining employee status include the economic realities test, IRS 20-factor test, and common law agency test. Joint employment can occur when multiple entities exercise control over a worker's conditions.
Classifying independent contractors vs. employees AMT Warranty
Both large and small businesses across the country utilize independent contractors or freelancers. As these workers fuel today’s gig economy, understanding the difference between a company employee and an independent contractor is important for an organization’s tax purposes. Insurance Journal recently shared that government agencies are auditing companies to see if they are classifying their workers as independent contractors instead of workers to avoid paying workers’ comp, unemployment taxes, social security and Medicare.
Independent Contractor or Employee? Understanding the Risk of Misclassificati...ComplyRight, Inc.
Many businesses choose to work with independent contractors, which is perfectly acceptable. But only if you follow the legal parameters. The IRS has strict worker classification rules regarding who is a contractor and who is an employee. Get it wrong and you could face severe penalties, including back taxes, steep fines and, in some cases, even prison.
White Paper: Complying With Regulations Regarding Temporary Workersss
The use of temporary workers is growing in the United States, now representing 22% of the total workforce. Temporary workers are referred to as freelancers, non-employees, indirect workers, agency contractors, consultants, interns, independent contractors, and many other terms.
This document discusses the differences between classifying workers as employees versus independent contractors. Classifying workers incorrectly can result in IRS penalties and fines. The IRS uses several factors to determine proper classification, focusing on behavioral control, financial control, and the relationship between the parties. Intentionally misclassifying workers as independent contractors when they are really employees carries greater risks of penalties than unintentional misclassification. It is safest to classify ambiguous workers as employees or seek professional advice.
Independent contractor or common law employee 2013lukem
The document discusses the differences between independent contractors and common law employees and the issues around misclassifying workers. It notes that the IRS estimates that 80% of contractors are misclassified as independent when they are actually employees. Misclassification can trigger audits and penalties for businesses. The document outlines the IRS 20-factor test and states' ABC tests to determine proper worker classification. It also discusses Section 530 relief from penalties for past misclassifications if certain conditions are met.
This document summarizes an independent contractor and employee classification presentation given by Christina M. Jepson of Parsons Behle & Latimer. It discusses why proper classification is important, different tests used to determine classification including the economic realities test and common law tests, consequences of misclassification, benefits of using independent contractors, best practices, and recent cases and legislation around gig workers. The presentation provides an overview of the complex legal analysis required to properly classify workers as employees or independent contractors.
This document discusses various types of contingent worker arrangements and the legal standards for determining employment relationships. It notes that misclassifying employees as independent contractors can result in back taxes, penalties, and litigation costs. The key tests for determining employee status include the economic realities test, IRS 20-factor test, and common law agency test. Joint employment can occur when multiple entities exercise control over a worker's conditions.
Classifying independent contractors vs. employees AMT Warranty
Both large and small businesses across the country utilize independent contractors or freelancers. As these workers fuel today’s gig economy, understanding the difference between a company employee and an independent contractor is important for an organization’s tax purposes. Insurance Journal recently shared that government agencies are auditing companies to see if they are classifying their workers as independent contractors instead of workers to avoid paying workers’ comp, unemployment taxes, social security and Medicare.
Independent Contractor or Employee? Understanding the Risk of Misclassificati...ComplyRight, Inc.
Many businesses choose to work with independent contractors, which is perfectly acceptable. But only if you follow the legal parameters. The IRS has strict worker classification rules regarding who is a contractor and who is an employee. Get it wrong and you could face severe penalties, including back taxes, steep fines and, in some cases, even prison.
Working with Independent Contractors: Smart Strategies for Effective (and Leg...ComplyRight, Inc.
Do you sometimes turn to freelancers, consultants and other independent contractors to get the work done? With the IRS and Department of Labor (DOL) both cracking down on contractor misclassification, following the rules has never been more critical. The risks include having to pay fines, back pay and back taxes.
This free, expert-led webinar to learn best practices for establishing a legally sound independent contractor relationship from day one. You’ll also receive helpful guidance on how to manage contractors’ day to day without stepping over the ‘employee’ line. The webinar will cover:
• Why proper classification matters (and what can happen if you get it wrong)
• What it takes to establish a contractor relationship under the law
• Helpful tips to ensure you don’t cross the line from contractor to employee
• Critical components every contractor agreement should include
The document provides an overview of a toolkit for hiring independent contractors in a legally compliant manner. It discusses the differences between employees and independent contractors, factors that determine compliance, best practices for finding, screening and onboarding independent contractors, and key elements to include in independent contractor agreements and scopes of work. The toolkit is intended to help businesses understand compliance requirements and successfully manage independent contractor relationships.
Independent Contractors: Overcoming the Legal Perils and ChallengesCarol Buckmann
Worldwide Employee Benefits presentation on October 17, 2013 - Presenters: Thomas F. Hurka of Morgan, Lewis & Bockius LLP; Craig A. Bitman of Morgan, Lewis & Bockius LLP; Moderator: Heidi Winzeler of Practical Law Company
Reply 1 OdellaThe difference between an employee and an indep.docxaudeleypearl
Reply 1
Odella:
The difference between an employee and an independent contractor, is how the employer pays them and how their taxes are paid. An employee is paid by the hour, salary, commission or combination of both. An employee also could get overtime. An employee receive a W-2 form, which shows their yearly income. The reason that they receive a W-2, because their employer withhold federal and state income taxes and FICA taxes, which is social security and medicare.
An independent contractor is provided a 1099, the employer that they do work for does not withheld their federal, state and FICA taxes from the amount the company pay's them. An independent contractor is liable for their own income taxes, which is called self-employment. However, an independent contractor works without the legal amenities that will protect them, but an employee does. For example, wage and hour laws, workers compensation and unemployment benefits.
There have been several cases, that have led to companies being penalized, by the mis-classification of their employees. When an employer mis-classify an employee, they would label he/she as an independent contractor; because this will disable the company in paying taxes on employees. Such as unemployment taxes, unemployment insurance and workers compensation.
When companies mis-classify their employees, will cause an effect on the state and federal government. That is short changing them on their tax revenue by millions of dollars. With mis-classifying employees, this will be a legal and ethical issue. For instance, the reason why companies will mis-classify an employee and an independent contractor is, to save on labor costs. Labor costs is a major portion of the company. overhead.
Mis-classifying workers has a big negative result at the end, for the company. For example, when a company intentionally classify employees as independent contractors; it becomes unethical. This is a fraudulent act toward the state and federal governments.
As a result, the state and federal have taken action to penalize companies, who have been mis-classifying their employees. The IRS have implemented some test in reference to decipher an employee from an independent contractor. The test consist of behavioral control, financial control and type of responsibility.
Fines are generated from the U.S. Department of Labor (DOL), IRS and other state agencies. Some of the fines that companies are responsible for is, back pay on taxes, interest on employees' wages and FICA taxes that were not withheld. Failure to make payments to the government, can produce additional fines.
Reference
Post, J. (2018, September 20). Worker Classification: What You Need to Know about Employee vs. Contractor. Retrieved from https://www.businessnewsdaily.com/770-contract-vs-employees-what-you-need-to-know.html.
Reply 2
Zach:
To safeguard against misclassification of workers, the IRS has compiled a list of 20 factors to help individuals and employers understand th ...
It's important for employers to know the legal definitions of employee and independent contractor. The IRS common law test uses three categories of evidence to examine who controls what work will be done and how and when it will be done. Review these categories to determin whether you have an employee-employer relationship.
Employment Practices Liability Insurance (EPLI) and Workers CompensationTom Daly
Please join us for a discussion with Cleve Daigle, Vice President of Hartwig Moss Insurance Agency (HMIA). Below are some of the topics Cleve will be discussing.
Employment Practices Liability Insurance (EPLI):
- What types of employee-related lawsuits are covered?
- Facts about Employment Practices Lawsuits
- Best Defenses against Employment Practices Lawsuits
Worker's Compensation Insurance:
- History of Worker’s Compensation Insurance
- 4 Types of Benefits Provided by Worker’s Comp Insurance
- Employers Liability Coverage
- What’s Best for Business Owners - Worker’s Comp or Medical Insurance?
- Best Defenses against Employment Practices Lawsuits
HR compliance update is essential for keeping up with ever-changing laws and regulations. Start 2020 confident you can handle the questions from supervisors, employees, and corporate leaders about employment law changes.
January 2011 - Business Law & Order - Mark HeuselAnnArborSPARK
Hiring practices; Employees vs Independent Contractors; Wage & Hour Issues; Discrimination Issues; Whistleblower protection; Best practices
Mark Heusel is a Member of Dickinson Wright, PLLC’s Ann Arbor office. Dickinson Wright is a international law firm with offices in Michigan, Washington D.C., Nashville, Phoenix, Las Vegas and Toronto. Mr. Heusel works with companies in a variety of circumstances in the commercial litigation and employment law areas. He has substantial experience in advising clients on a host of employment related issues, including litigation avoidance, human resource issues, discrimination and wrongful termination litigation, non-compete and trade secret matters, and business practices. He is also a frequent lecturer and author on these issues and when necessary, a vigorous litigator.
The issue of whether workers should be classified as employees or independent contractors for federal employment tax purposes has been a source of controversy for decades. The saga continues. This article summarizes a recent Tax Court decision on the classification of a manager in the home care industry.
20 Factor Test Employee Or Sub Contractordmaaskant
This document gives greater detail on the 20 Factors the IRS and other taxing agencies use during an audit. Much more clear than the IRS publication, but note - not published by the IRS.
The document discusses various factors to consider when determining employee pay rates, including compensation plans, legal requirements, and equity. It covers types of wages based on time or performance, exempt vs non-exempt employee classifications, key US labor laws, and how to align compensation with business strategy and maintain pay equity.
The document is an employment law newsletter from the law firm Tharpe & Howell. It summarizes three legal cases related to mandatory arbitration clauses, safety programs impact on workers' compensation premiums, and penalties for misclassifying employees. It provides contacts for the firm's labor lawyers to discuss these issues.
The federal government's interpritation of an employee versus a contractor is becoming more stringent. This article by Peter McDonald, CPA of Smith Elliott Kearns & Co., LLC explains several key questions which will help you understand the difference.
HR Managers Guide to Proper Worker ClassificationSage HRMS
The document provides guidance to HR managers on properly classifying workers as employees or independent contractors. It discusses the importance of proper classification and potential penalties for misclassification. The IRS examines behavioral control, financial control and the type of relationship to determine a worker's status. The summary advises routinely reviewing classifications and maintaining documentation to support decisions. Potential future legislation aims to further reduce misclassification issues.
The document discusses employment relationships and classifications. It describes independent contractors, employees, and statutory employees and nonemployees according to IRS definitions. It also discusses exempt employees and tests to qualify for different exemptions. The document then covers compensation plans, including calculating breakeven points and different types of plans such as commission, salary plus bonus, and 100% commission plans. Finally, it discusses developing a recruiting strategy, including attracting potential agents by creating a hiring profile and timeline for hiring associates as well as identifying where to find ideal associates.
Understanding Statutory Compliance Requirements in Payroll what are the impor...TalentPro India HR Pvt Ltd
Understanding Statutory Compliance Requirements in Payroll, what are the important payroll statutory compliances?
https://www.talentproindia.com/2022/11/08/understanding-statutcompliance-requirements-in-payroll-what-are-the-important-payroll-statutory-compliances/
Employee vs. Independent Contractor - How to Differentiate and Avoid Penalties?benefitexpress
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.
The document discusses the need for companies to conduct compensation audits to ensure compliance with the Lilly Ledbetter Fair Pay Act and avoid potential lawsuits related to pay discrimination. It provides details on how compensation audits should be conducted, including reviewing policies, practices, job classifications, and analyzing compensation data to identify any patterns of inequities related to gender or race. The audit should be conducted under legal privilege and look at various factors that could influence pay, like experience, performance, and job responsibilities. At the end, risks should be identified and mitigation actions proposed to address issues and minimize future risks.
This document discusses working collaboratively in Tarrant County, Texas to promote economic growth and opportunity for all following the COVID-19 pandemic. It notes that pre-pandemic the county had a strong economy but many families struggled, with 25% considered ALICE (Asset Limited, Income Constrained, Employed). The pandemic exacerbated issues and hit these families hardest. The community responded creatively through donations, partnerships, and assistance. Moving forward, the document calls for collaboration between education, business, non-profits, and public-private partnerships to train the workforce, strengthen community ties, and maximize resources to ensure recovery benefits all residents.
Working with Independent Contractors: Smart Strategies for Effective (and Leg...ComplyRight, Inc.
Do you sometimes turn to freelancers, consultants and other independent contractors to get the work done? With the IRS and Department of Labor (DOL) both cracking down on contractor misclassification, following the rules has never been more critical. The risks include having to pay fines, back pay and back taxes.
This free, expert-led webinar to learn best practices for establishing a legally sound independent contractor relationship from day one. You’ll also receive helpful guidance on how to manage contractors’ day to day without stepping over the ‘employee’ line. The webinar will cover:
• Why proper classification matters (and what can happen if you get it wrong)
• What it takes to establish a contractor relationship under the law
• Helpful tips to ensure you don’t cross the line from contractor to employee
• Critical components every contractor agreement should include
The document provides an overview of a toolkit for hiring independent contractors in a legally compliant manner. It discusses the differences between employees and independent contractors, factors that determine compliance, best practices for finding, screening and onboarding independent contractors, and key elements to include in independent contractor agreements and scopes of work. The toolkit is intended to help businesses understand compliance requirements and successfully manage independent contractor relationships.
Independent Contractors: Overcoming the Legal Perils and ChallengesCarol Buckmann
Worldwide Employee Benefits presentation on October 17, 2013 - Presenters: Thomas F. Hurka of Morgan, Lewis & Bockius LLP; Craig A. Bitman of Morgan, Lewis & Bockius LLP; Moderator: Heidi Winzeler of Practical Law Company
Reply 1 OdellaThe difference between an employee and an indep.docxaudeleypearl
Reply 1
Odella:
The difference between an employee and an independent contractor, is how the employer pays them and how their taxes are paid. An employee is paid by the hour, salary, commission or combination of both. An employee also could get overtime. An employee receive a W-2 form, which shows their yearly income. The reason that they receive a W-2, because their employer withhold federal and state income taxes and FICA taxes, which is social security and medicare.
An independent contractor is provided a 1099, the employer that they do work for does not withheld their federal, state and FICA taxes from the amount the company pay's them. An independent contractor is liable for their own income taxes, which is called self-employment. However, an independent contractor works without the legal amenities that will protect them, but an employee does. For example, wage and hour laws, workers compensation and unemployment benefits.
There have been several cases, that have led to companies being penalized, by the mis-classification of their employees. When an employer mis-classify an employee, they would label he/she as an independent contractor; because this will disable the company in paying taxes on employees. Such as unemployment taxes, unemployment insurance and workers compensation.
When companies mis-classify their employees, will cause an effect on the state and federal government. That is short changing them on their tax revenue by millions of dollars. With mis-classifying employees, this will be a legal and ethical issue. For instance, the reason why companies will mis-classify an employee and an independent contractor is, to save on labor costs. Labor costs is a major portion of the company. overhead.
Mis-classifying workers has a big negative result at the end, for the company. For example, when a company intentionally classify employees as independent contractors; it becomes unethical. This is a fraudulent act toward the state and federal governments.
As a result, the state and federal have taken action to penalize companies, who have been mis-classifying their employees. The IRS have implemented some test in reference to decipher an employee from an independent contractor. The test consist of behavioral control, financial control and type of responsibility.
Fines are generated from the U.S. Department of Labor (DOL), IRS and other state agencies. Some of the fines that companies are responsible for is, back pay on taxes, interest on employees' wages and FICA taxes that were not withheld. Failure to make payments to the government, can produce additional fines.
Reference
Post, J. (2018, September 20). Worker Classification: What You Need to Know about Employee vs. Contractor. Retrieved from https://www.businessnewsdaily.com/770-contract-vs-employees-what-you-need-to-know.html.
Reply 2
Zach:
To safeguard against misclassification of workers, the IRS has compiled a list of 20 factors to help individuals and employers understand th ...
It's important for employers to know the legal definitions of employee and independent contractor. The IRS common law test uses three categories of evidence to examine who controls what work will be done and how and when it will be done. Review these categories to determin whether you have an employee-employer relationship.
Employment Practices Liability Insurance (EPLI) and Workers CompensationTom Daly
Please join us for a discussion with Cleve Daigle, Vice President of Hartwig Moss Insurance Agency (HMIA). Below are some of the topics Cleve will be discussing.
Employment Practices Liability Insurance (EPLI):
- What types of employee-related lawsuits are covered?
- Facts about Employment Practices Lawsuits
- Best Defenses against Employment Practices Lawsuits
Worker's Compensation Insurance:
- History of Worker’s Compensation Insurance
- 4 Types of Benefits Provided by Worker’s Comp Insurance
- Employers Liability Coverage
- What’s Best for Business Owners - Worker’s Comp or Medical Insurance?
- Best Defenses against Employment Practices Lawsuits
HR compliance update is essential for keeping up with ever-changing laws and regulations. Start 2020 confident you can handle the questions from supervisors, employees, and corporate leaders about employment law changes.
January 2011 - Business Law & Order - Mark HeuselAnnArborSPARK
Hiring practices; Employees vs Independent Contractors; Wage & Hour Issues; Discrimination Issues; Whistleblower protection; Best practices
Mark Heusel is a Member of Dickinson Wright, PLLC’s Ann Arbor office. Dickinson Wright is a international law firm with offices in Michigan, Washington D.C., Nashville, Phoenix, Las Vegas and Toronto. Mr. Heusel works with companies in a variety of circumstances in the commercial litigation and employment law areas. He has substantial experience in advising clients on a host of employment related issues, including litigation avoidance, human resource issues, discrimination and wrongful termination litigation, non-compete and trade secret matters, and business practices. He is also a frequent lecturer and author on these issues and when necessary, a vigorous litigator.
The issue of whether workers should be classified as employees or independent contractors for federal employment tax purposes has been a source of controversy for decades. The saga continues. This article summarizes a recent Tax Court decision on the classification of a manager in the home care industry.
20 Factor Test Employee Or Sub Contractordmaaskant
This document gives greater detail on the 20 Factors the IRS and other taxing agencies use during an audit. Much more clear than the IRS publication, but note - not published by the IRS.
The document discusses various factors to consider when determining employee pay rates, including compensation plans, legal requirements, and equity. It covers types of wages based on time or performance, exempt vs non-exempt employee classifications, key US labor laws, and how to align compensation with business strategy and maintain pay equity.
The document is an employment law newsletter from the law firm Tharpe & Howell. It summarizes three legal cases related to mandatory arbitration clauses, safety programs impact on workers' compensation premiums, and penalties for misclassifying employees. It provides contacts for the firm's labor lawyers to discuss these issues.
The federal government's interpritation of an employee versus a contractor is becoming more stringent. This article by Peter McDonald, CPA of Smith Elliott Kearns & Co., LLC explains several key questions which will help you understand the difference.
HR Managers Guide to Proper Worker ClassificationSage HRMS
The document provides guidance to HR managers on properly classifying workers as employees or independent contractors. It discusses the importance of proper classification and potential penalties for misclassification. The IRS examines behavioral control, financial control and the type of relationship to determine a worker's status. The summary advises routinely reviewing classifications and maintaining documentation to support decisions. Potential future legislation aims to further reduce misclassification issues.
The document discusses employment relationships and classifications. It describes independent contractors, employees, and statutory employees and nonemployees according to IRS definitions. It also discusses exempt employees and tests to qualify for different exemptions. The document then covers compensation plans, including calculating breakeven points and different types of plans such as commission, salary plus bonus, and 100% commission plans. Finally, it discusses developing a recruiting strategy, including attracting potential agents by creating a hiring profile and timeline for hiring associates as well as identifying where to find ideal associates.
Understanding Statutory Compliance Requirements in Payroll what are the impor...TalentPro India HR Pvt Ltd
Understanding Statutory Compliance Requirements in Payroll, what are the important payroll statutory compliances?
https://www.talentproindia.com/2022/11/08/understanding-statutcompliance-requirements-in-payroll-what-are-the-important-payroll-statutory-compliances/
Employee vs. Independent Contractor - How to Differentiate and Avoid Penalties?benefitexpress
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.
The document discusses the need for companies to conduct compensation audits to ensure compliance with the Lilly Ledbetter Fair Pay Act and avoid potential lawsuits related to pay discrimination. It provides details on how compensation audits should be conducted, including reviewing policies, practices, job classifications, and analyzing compensation data to identify any patterns of inequities related to gender or race. The audit should be conducted under legal privilege and look at various factors that could influence pay, like experience, performance, and job responsibilities. At the end, risks should be identified and mitigation actions proposed to address issues and minimize future risks.
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2. Overview
Difference between independent contractors and
employees
Tests used to determine independent contractor
status
The benefits of using independent contractors
The consequences of misclassifying employees as
independent contractors
Best practices and recent trends
3. What is an Independent Contractor?
Generally, an independent contractor is a worker who:
Offers their services to the public for a fee
Is not economically dependent on any single
company
Is not an employee
4. What is an Independent Contractor? (cont’d)
An independent contractor typically:
Is engaged only for the time required to perform a specified service or
task
Retains control over the method and manner of work
Retains economic independence and is free to offer their services to
more than one company
Is responsible for paying their own income, social security, and medical
taxes
Is not covered by most federal, state, or local laws designated to protect
employees.
5. What is an Independent Contractor? (cont’d)
An independent contractor typically does not:
Receive company-sponsored benefits, such as paid
vacation, health insurance, or retirement benefits.
Perform the same work as the company’s employees.
Have the “indicia” of an employee, such as company
uniforms, name badges, or business cards.
6. Independent Contractor vs. Employee
An employee, by comparison, is subject to significant oversight and control by the
company and:
Is paid wages and receives company-sponsored benefits.
Is employed for a continuous period and performs whatever
tasks the company requires.
Generally, pays their income, social security, and Medicare
taxes through the amounts their employer is obligated to
withhold from their wages.
Is economically dependent on the employer.
Is protected by applicable federal, state, and local
employment laws.
7. Tests for Independent Contractor Status
Do not rely on generalizations or labels to determine employee or
independent contractor status.
Simply referring to a worker as an independent contractor, even if they
agree to that designation, is not enough.
Classification depends on:
The facts of each case.
Application of the appropriate independent contractor tests.
Differences in how courts and government agencies interpret those tests.
8. Tests for Independent Contractor Status (cont’d)
There is no single test to determine independent contractor status for all
purposes.
The various tests include:
The Economic Realities Test.
The Control Test.
Common law and other federal law tests.
State law tests.
9. Economic Realities Test
Used to assess independent contractor status under the Fair Labor
Standards Act (FLSA).
Courts look at the totality of the parties’ relationship and use a
balancing test to evaluate various factors, including:
The degree of control the company has over the worker.
The relative investment in facilities.
The worker's opportunity for profit and loss.
The permanency of the parties' relationship.
The skill required.
Whether the worker's services are integral to the company's business.
10. The Control Test: The IRS Standard
Used to determine whether a worker is an employee for
federal tax purposes.
Analyzes three aspects of the worker's control or
independence:
Behavioral control.
Financial control.
The type of relationship.
11. The Common Law Darden Test
Commonly used in the context of Title VII of the Civil
Rights Act (Title VII), the Americans with Disabilities
Act (ADA), the Age Discrimination in Employment Act
(ADEA), the Affordable Care Act (ACA), and the
Employee Retirement Income Security Act (ERISA).
12. The Common Law Darden Test (cont’d)
The test considers the following factors:
Skill required.
Source of supplies and tools.
Location of the work.
Duration of the relationship between the parties.
The company’s right to assign additional projects to the worker.
Extent of the worker’s discretion over when and how long to work.
Method of payment.
The worker’s role in hiring and paying assistants.
Regular business of the company and whether the work performed is part of
that business.
The company’s status as "in business."
13. The Common Law 20-Factor Test
Previously used by the IRS, this test is commonly used by state agencies
making independent contractor determinations.
The 20 factors are:
Instructions.
Training.
Integration with the company's operations.
Services rendered personally.
Hiring, supervising, and paying helpers.
Continuing relationship.
Set hours of work.
Full time or exclusive work.
14. The Common Law 20-Factor Test (cont’d)
Location where services are performed.
Specifying the order or sequence of work.
Oral or written reports.
Payments.
Business or travel expenses.
Tools and materials.
Investment.
Profit and loss.
Number of companies with whom the independent contractor works.
Advertising services to the general public.
Right to fire.
Right to quit.
15. Other State Law Test (ABC Test)
State independent contractor tests can impose a more narrow definition
than the federal equivalent.
The most common state test is the ABC Test.
The ABC Test presumes an employment relationship unless the company
shows that:
(A) The worker has been and will continue to be free from control or direction
over the performance of their work.
(B) The work is either outside of the normal course of business for the company
requesting the work or performed outside of any of that company's places of
business.
(C) The worker is customarily engaged in an independently established trade,
occupation, profession, or business.
16. Special IRS Classifications
The IRS has determined that three categories of
workers are classified as independent contractors for
all federal tax purposes:
Direct sellers.
Licensed real estate agents.
Companion sitters.
17. Benefits of Using Independent Contractors
Because independent contractors are not employees, companies that use
them can generally avoid certain obligations and expenses, including:
Tax and insurance obligations.
Employment law compliance.
Employee benefits.
Immigration law compliance.
Affordable Care Act (ACA) compliance.
18. Tax and Insurance Obligations
By engaging independent contractors, companies can generally avoid tax
payments, withholdings, and insurance obligations required on behalf of
employees, including:
Federal, state, and local income taxes.
Social security and Medicare taxes.
Federal unemployment insurance taxes.
State unemployment insurance taxes.
Workers' compensation insurance.
19. Employment Law Compliance
Federal employment laws that cover employees, but generally not
independent contractors, include:
Fair Labor Standards Act (FLSA).
Title VII of the Civil Rights Act (Title VII).
Equal Pay Act (EPA).
Age Discrimination in Employment (ADEA).
Americans with Disabilities (ADA).
Genetic Information Nondiscrimination Act (GINA).
Uniformed Services Employment Reemployment Rights Act (USERRA).
Occupational Safety and Health Act (OSH Act).
Worker Adjustment Retraining Notification Act (WARN).
Family and Medical Leave Act (FMLA).
Employee Retirement Income Security Act (ERISA).
National Labor Relations Act (NLRA).
20. Employee Benefits
Companies often provide benefits to their employees that are not available to
independent contractors including, for example:
Health insurance, including cafeteria plans.
Retirement or pension plans.
Stock options.
Paid vacations.
Sick days.
Life insurance.
Disability insurance.
Fringe benefits, such as tuition reimbursement.
21. Immigration Law Compliance and
Affordable Care Act (ACA) Compliance
Employers are not required to:
Verify work authorization (by completing Form I-9) for
independent contractors.
Provide coverage under the ACA for independent
contractors who do not meet the common law definition of
"employee."
22. Consequences of Misclassification
The penalties for misclassification can be serious. If a company misclassifies an
employee as an independent contractor, it must ensure compliance going
forward and may be liable for:
Back wages and overtime pay.
Employee benefits, including stock options, retirement benefits, and health plan
coverage (or the value of those benefits).
Disability payments and workers' compensation.
Tax and insurance obligations.
Liquidated damages.
Civil monetary penalties.
23. Employment Law Compliance
Improperly classifying an employee as an independent contractor
could lead to claims for:
Unpaid overtime compensation and reimbursement of work-related
expenses.
Reasonable accommodation and return to work benefits under the ADA
and its state equivalents.
Leaves of absence under the FMLA and its state equivalents.
Plant closure and mass layoff notice and penalties under WARN and its
state equivalents.
Discrimination under Title VII, ADEA, and other federal, state, and local
anti-discrimination laws.
24. The Affordable Care Act
Misclassification of employees as independent
contractors directly impacts both:
A company's compliance obligations under the ACA.
Its exposure to related penalties.
25. Tax and Insurance Obligations
The tax and insurance liabilities for misclassification
are significant and can include:
Years of unpaid federal, state, and local income tax
withholdings.
Social security and Medicare contributions.
Workers' compensation and unemployment insurance
premiums, including federal unemployment taxes.
Interest and penalties.
26. Targets of Enforcement and Litigation
Industries particularly susceptible to regulatory enforcement for
independent contractor misclassification include:
Construction.
Transportation and trucking.
Cable companies.
Janitorial services.
Landscaping and nurseries.
Security services.
Nursing.
Delivery drivers.
Child care.
Home health care.
Internet services.
Restaurant and catering services.
Staffing services.
Hotels and motels.
Oil and gas.
27. Best Practices
To ensure that independent contractor classification requirements are
satisfied:
Use an independent contractor agreement to establish the terms of the working
relationship.
Avoid using former employees as independent contractors and having
independent contractors do the same work as employees.
Avoid using independent contractors to perform work that is integral to the
business.
Require independent contractors to complete a Form W-9, Request for
Taxpayer Identification Number and Certification.
Keep independent contractor files with vendor files, not employee files.
28. Best Practices (cont'd)
Pay contractors by the project or by an agreed-on flat fee at regular intervals,
not by the hour, week, or month.
Do not reimburse independent contractors for business expenses.
Do not provide contractors with employee-type benefits like paid
vacation, paid holidays, sick leave, and retirement benefits.
Do not schedule hours or days of work for contractors or their
employees.
Avoid requiring uniforms, grooming standards, and similar workplace
requirements typically imposed on employees.
Issue separate guidelines for independent contractors, vendors, and
other third parties instead of providing them with a copy of the
employee handbook.
29. Best Practices (cont'd)
Do not invite contractors to employee-only events or meetings.
Do not provide contractors with company business cards.
Do not give independent contractors job titles.
Deal with performance problems as contract modification or breach issues, not
as disciplinary issues. Do not conduct performance evaluations for independent
contractors. Do not involve Human Resources in the business relationship with
independent contractors.
Determine if the company's competitors classify similar workers as employees
instead of independent contractors.
Regularly audit the company's independent contractor arrangements and
template agreements.
Do not control the details of how the independent contractor performs the work.
Focus on the end result rather than the details.
30. Trends
Independent contractors play a significant role in the on-demand
business model.
The on-demand economy refers to the use of technology to deliver
goods and services to users on demand including, for example:
Car service (Uber and Lyft).
Accommodations (Airbnb).
Grocery purchase and delivery (Instacart).
Home cleaning and handyman services (Handy).
Personal assistant and concierge services (TaskRabbit).
Dog-walking services (Rover).
31. Trends (cont’d)
Drivers, shoppers, and taskers are frequently classified as independent
contractors and are generally free to accept or reject work opportunities based
on their own schedule and use their own vehicles, tools, and supplies.
Some workers and regulatory agencies such as the Department of Labor
(DOL), however, have challenged the independent contractor status of on-
demand workers under state and federal law.
32. Trends (cont’d)
Companies operating in the on-demand economy
should:
Continue to monitor misclassification litigation
against on-demand providers.
Become familiar with those aspects of independent
contractor arrangements that courts and regulatory
agencies determine are inconsistent with existing
independent contractor classification standards.
33. Hypothetical 1
Jan is a graphic designer for Image, Inc., a graphic design company. Jan has excellent
credentials and has been a valued Image employee for several years. Upon returning from
maternity leave, Jan told her manager that she's decided to stay home with her new baby
and two other young children instead of working full time. However, Jan said she would like
to work a few hours a week to keep her skills sharp and to earn a small income. Jan's
manager believes a few hours a week is better than losing Jan altogether and agrees to
hire her as an independent contractor. The manager asks Jan to sign an agreement
acknowledging in writing that she is an independent contractor and asks her to set up a
business entity, as required by Image's vendor guidelines. Jan establishes an LLC, signs
the agreement, and begins working 10 hours a week as a contractor for Image. Both Jan
and her manager are happy with the arrangement.
------
Is Jan properly classified as an independent contractor under the FLSA?
34. Answer to Hypothetical 1
Probably not.
The hypothetical does not tell us some important facts, such as whether Jan provides
design services for clients other than Image, whether she is paid hourly or on some
other basis, and which party (Jan or Image) determined her rate of pay, schedule, and
so on.
Additionally, the fact that Jan now does the same work as a contractor for Image that
she once did as its employee seriously undermines her classification as an
independent contractor. Employees and independent contractors generally are not
interchangeable. Jan's work as a graphic designer is also integral to Image's business,
which suggests an employment relationship may exist.
35. Hypothetical 2
Jane is a certified personal trainer with several years of experience. She
teaches individual and group sessions at three different gyms, including Bolt.
Bolt is part of a large chain of gyms and a consistent client experience is part of
its business model. For that reason, Bolt asks Jane to wear a Bolt nametag and
Bolt activewear when she is teaching. Bolt schedules the sessions, handles
registration, collects session fees from Bolt members, and pays Jane a flat fee
for each session. Jane must commit to at least ten session hours each week
and at least four hours every Saturday for consultations scheduled by Bolt.
Jane enjoys the flexibility and variety of working at different facilities, but she
prefers the arrangement with Bolt because, unlike the other gyms, she is not
responsible for administrative tasks such as scheduling and collecting money.
Also, Bolt has the best equipment of the three and does not charge her rent for
the studio space.
36. Hypothetical 2 (cont’d)
Recently though, Bolt canceled several of her sessions at
the last minute because of low registration numbers. Jane
was able to replace some of the lost income by scheduling
extra sessions at another gym, but she was not paid for the
time she spent at Bolt setting up and putting away
equipment in preparation for the sessions Bolt ultimately
canceled. When she complained to a fellow trainer, he said
Bolt should pay her for that time, even if the sessions were
canceled, because she is a Bolt employee.
------
Is Jane’s fellow trainer correct?
37. Answer to Hypothetical 2
Probably.
Many of the facts in this hypothetical suggest an
employment relationship exists. For example, Bolt
exercises a significant degree of control over Jane’s work,
including scheduling sessions and consultations,
registering participants, and collecting payment. Bolt
requires a minimum number of hours from Jane, which
must coincide with Bolt’s session schedule, and requires
Jane to wear its branded clothing and nametag. Jane
personally performs the work for Bolt and does so at Bolt’s
location.
38. Answer to Hypothetical 2 (cont’d)
Jane is paid a flat fee for each session, regardless
of the number of participants, and is paid nothing if
Bolt decides to cancel a session Jane is scheduled
to teach. Also, Jane’s investment is minimal
compared to Bolt. Bolt provides the studio space
and equipment, and covers costs such as
advertising and overhead.
Finally, Jane’s work as a personal trainer may be
considered “integral” to Bolt’s physical fitness
business.
Presenter Notes:
An entity contracting with an independent contractor generally has the right to control only the end result of the project, not how the independent contractor accomplishes it.
Companies that engage independent contractors issue them Form 1099-NEC (before tax year 2020, Form 1099-MISC) for income-reporting purposes (if the company paid the independent contractor at least $600 that year). The contracting company generally has no obligation to provide benefits to the independent contractor or withhold or pay employment taxes on the contractor's behalf (except when backup withholding is required, in the case of a missing or incorrect tax identification number for the independent contractor). State and local law, however, may extend certain rights and protections to independent contractors, such as paid leave for specified purposes.
In addition, independent contractors are generally free to offer their services to the public and to perform work for other clients. Independent contractors often own their own businesses and provide services according to their own terms.
Presenter Notes:
Independent contractors typically do not perform the same work as the company’s employees. For example, a graphic designer may be an independent contractor when they offer graphic design services to a shoe company but is more likely to be an employee if they provide graphic design services to a graphic design company. Independent contractors and employees are not interchangeable.
Whether an independent contractor has the “indicia” of an employee depends on the circumstances. For example, in some situations, an independent contractor needs access to the employer’s workplace, which requires a company-issued ID badge. Companies can often address these situations by, for example, issuing ID badges to independent contractors that are different from those used by employees, such as badges that are a different color or size, only allow access to certain areas, and expire on a particular date.
State and local law, however, may extend certain rights and protections to independent contractors, such as paid leave for specified purposes.
Presenter Notes:
An employee is not required to pay all employment taxes directly to the government. The company pays certain taxes on the employee's behalf through wage withholdings.
Presenter Notes:
There is no single test to evaluate independent contractor status for all purposes and compliance is often complicated by the fact that different tests may apply to the same situation. For example, the test to determine independent contractor status under federal tax law is not the same as the test applied under the Fair Labor Standards Act (FLSA).
Different tests and interpretations can mean:
A worker is an independent contractor for some purposes and an employee for others (such as under state and federal law, for example).
A worker who provides two different services to the employer is an employee for one purpose and an independent contractor for the other.
Courts applying the same test to the same position may arrive at different results.
Presenter Notes:
No single factor determines a worker's status as an employee or independent contractor. Courts look at the working relationship as a whole, rather than looking at only the parties’ agreement, the worker’s title, or other isolated factors.
The Department of Labor (DOL) has traditionally relied on these same or similar factors, as well as evaluating the degree of independent business organization and operation.
The agency has also taken the view that the time or mode of payment is not conclusive evidence of independent contractor status and that it is irrelevant:
Where the work is performed.
Whether a formal agreement exists.
Whether the worker has incorporated a business or is licensed by a government agency.
However, the DOL's current position on independent contractor classification under the FLSA is unsettled and the agency's definition of the appropriate test has changed in recent years. Companies engaging independent contractors should continue to monitor developments affecting independent contractor classification, including new rulemaking.
Presenter Notes:
Behavioral control: A worker is an employee when the company (or other third party) has the right to direct and control the worker. This factor considers whether the company controls or has the right to control not only what the worker does, but how the worker does it.
Financial control: This refers to whether the company has the right to control the economic aspects of the worker's job. This factor considers whether the business aspects of the worker's job are controlled by the company or the worker (including, for example, how the worker is paid, whether expenses are reimbursed, and which party provides tools and supplies).
Type of relationship: This refers to how the relationship is perceived by the worker and company. It depends to a large extent on how the relationship is structured. This factor considers whether:
The parties have a written agreement. A written agreement supports an independent contractor relationship.
The worker receives employee-type benefits (for example, pension plan, insurance, or vacation pay). Receipt of those benefits suggests an employment relationship.
The relationship is indefinite. An indefinite relationship suggests an intent to create an employment relationship.
The services provided are a key activity of the business. Provision of key services suggests the worker is an employee.
Presenter Notes:
The Common Law Darden Test (named after the case brought by an agent to recover retirement benefits) also considers:
The provision of employee benefits.
The tax treatment of the worker.
The test focuses on the company’s right to control the manner and means by which the worker performs the work.
Another test used by some courts is the "Hybrid Test," which is a hybrid of the common law Darden factors and the economic realities test. The test is used by some courts to determine independent contractor status under employment statutes like Title VII and the ADEA.
Presenter Notes:
Instructions: An independent contractor generally should not be given instructions or procedures regarding details or methods and should not be supervised.
Training: An independent contractor generally should not need training and ideally should have previous expertise in performing the work.
Integration with the company's operations: An independent contractor's services are usually separate from the client's business and are not integrated or merged into it.
Services rendered personally: An independent contractor usually has the right to employ others and assign them to perform the services in their place.
Hiring, supervising, and paying helpers: If the company supervises or directs the work of the independent contractor's employees or assistants, this supports a finding of an employment relationship. A true independent contractor selects, hires, and reimburses their own assistants.
Continuing relationship: An independent contractor tends to be hired for a finite project and the relationship ends when the project is complete. An indefinite or continuing relationship is indicative of an employment relationship.
Set hours of work: Requiring a worker to work during set hours is a clear indication of control and indicates an employment relationship.
Full time or exclusive work: An independent contractor is generally free to perform work for many companies simultaneously. Requiring the worker to work full time or exclusively for the company is a strong indicator that the worker is an employee.
Presenter Notes:
Location where services are performed: Requiring work to be done on company premises implies a degree of control over the work, suggesting an employment relationship. Independent contractors ordinarily work wherever they choose (though the type of work may dictate the location).
Specifying the order or sequence of work: A company generally has control over the worker if it specifies, by contract or in practice, the order or sequence of work.
Oral or written reports: Oral or written progress reports suggest an employment relationship.
Payments: An employee is typically paid at regular intervals, while an independent contractor is more likely to be paid a negotiated flat fee or to submit a bid and then be paid by the job. Paying the worker through payroll suggest an employment relationship while paying through accounts payable on receipt of an invoice suggests an independent contractor relationship.
Business or travel expenses: Few expenses are reimbursable to an independent contractor and those that are should be extraordinary. All normal office expenses should be paid for by the independent contractor.
Tools and materials: An independent contractor generally should have the tools and materials necessary to achieve the agreed upon results.
Investment: Independent contractors are expected to invest in their own business. If the contractor's investment is relatively minor compared to the company, it tends to undermine an independent contractor arrangement.
Profit and loss: Employees are generally shielded from profit and loss. Independent contractors, however, risk the investment of their time and money and may sustain losses as a result of a downturn in business. Independent contractors may also benefit from their own efforts to increase business and grow their investment.
Number of companies with whom the independent contractor works: Independent contractors typically can choose between competing assignments. The more dependent the worker is on a single company for income, the more likely an employment relationship exists.
Advertising services to the general public: Business cards, letterhead, and advertising may be indicators of independent contractor status.
Right to fire: The contract should only allow for termination if the results do not meet the contractual requirements. On the other hand, the ability to terminate the relationship at-will, especially before the task is complete and without any liability, suggests an employment relationship.
Right to quit: An independent contractor is usually contractually bound to complete the assignment and liable for any failure to deliver the specified result.
Presenter Notes:
In addition, a majority of states use the ABC Test for state unemployment tax purposes.
The test is called the ABC Test because of the three requirements ((A), (B), and (C)).
Presenter Notes:
These IRS determinations apply for all federal tax purposes (regardless of the outcome reached by applying any of the tests for independent contractor status):
"Direct sellers" include:
Workers engaged in selling (or soliciting the sale of) consumer products in homes or businesses other than in a permanent retail establishment.
Workers engaged in selling (or soliciting the sale of) consumer products to any buyer on a buy-sell, deposit-commission, or similar basis, for resale in homes or businesses other than in a permanent retail establishment.
Workers engaged in delivering or distributing newspapers or shopping news (including any services directly related to that delivery or distribution).
"Licensed real estate agents" include workers engaged in appraisal activities for real estate sales if they earn income based on sales or other output.
"Companion sitters" are individuals who furnish personal attendant, companionship, or household care services to children, the elderly, or the disabled
State and local governments, however, are increasingly extending employee-type protections to independent contractors, such as requiring paid leave for specified purposes.
Presenter Notes:
Independent contractors are generally issued Form 1099-NEC (before tax year 2020, Form 1099-MISC) at the end of each year that they were paid $600 or more, whereas employees are issued a W-2.
Independent contractors are generally not entitled to unemployment compensation benefits.
However, unlike employees who may be limited to the exclusive remedy of workers' compensation, independent contractors are free to sue for work-related injuries.
Presenter Notes:
Independent contractors are not counted for purposes of determining coverage under these statutes and they cannot pursue the statutory remedies available to employees.
Various state and local employment laws also protect employees but generally do not cover independent contractors. State and local governments, however, are increasingly extending employee-type protections to independent contractors, such as requiring paid leave for specified purposes.
Fair Labor Standards Act (FLSA): The FLSA includes minimum wage and overtime pay requirements for nonexempt employees. For example, while the FLSA generally requires companies to pay nonexempt employees overtime compensation for hours worked over 40 in a workweek, it does not require that companies do the same for independent contractors.
Employee Retirement Income Security Act (ERISA): In the retirement plans context, ERISA requires companies to make 401(k) and retirement benefits available to all employees on the same basis. In addition, retirement plans can lose their tax qualification if they cover non-employees, such as independent contractors. Regarding health plans, independent contractor issues may arise in the plan eligibility context.
Also, the ACA expanded ERISA to require large employers to either provide health coverage that is affordable and provides minimum value or pay a penalty. Misclassification issues could affect whether employers are subject to this "play or pay" requirement (also known as the "employer mandate").
Presenter Notes:
The ACA determines "employee" status using the Common Law Darden Test. Workers properly classified as independent contractors are not counted among a company's employees for purposes of the ACA's coverage obligations and penalty calculations.
Presenter Notes:
Because an independent contractor is excluded from many of the tax and other employment law protections of an employment relationship, the DOL, the IRS, state government agencies, and courts construe independent contractor status narrowly and impose large penalties for misclassification.
A misclassified worker may be retroactively entitled to rights under local, state, and federal employment statutes.
Presenter Notes:
Penalties under the ACA's employer mandate are generally calculated by multiplying the number of full-time employees (less the first 30) by the applicable payment amount.
Therefore, reclassifying workers (who were previously treated as independent contractors) as employees can mean:
The company now has a sufficiently large population of full-time employees to qualify as a large employer for employer mandate purposes and additional requirements involving ACA information reporting.
Non-compliance penalties under the ACA increase as the number of full-time employees used to calculate those penalties increases.
Presenter Notes:
The obligation to satisfy the independent contractor classification requirements continues beyond contractor selection.
Independent contractor agreements: Use written independent contractor agreements. Also, avoid using employment applications, employment agreements, and other employee on-boarding documents when engaging independent contractors. In addition:
Regularly review independent contractor agreements and make adjustments when necessary.
Prepare a new agreement if an independent contractor is engaged for a new term or project.
Form W-9: Require independent contractors to complete this form. Do not complete a Form I-9 for contractors.
Presenter Notes:
Payment of contractors: Require contractors to submit invoices and pay those invoices from accounts payable, not payroll. Issue a Form 1099-NEC to any independent contractor paid $600 or more in a particular year.
Business expenses: An independent contractor operates a business and is responsible for expenses. Contractors should factor business expenses, such as travel, supplies, and tool rental, into the cost of the project. A contractor's ability to manage expenses and set the fee for their services, without being reimbursed by the company for business expenses, supports a finding that the contractor is economically independent of the company.
Separate guidelines for independent contractors: These guidelines may include:
Entry and exit procedures.
Parking areas.
Policies prohibiting weapons, alcohol, tobacco, and drugs on company property.
Anti-harassment policy.
Contact information for company personnel responsible for interacting with contractors, vendors, and third parties.
Presenter Notes:
Employee-only events or meetings include:
Holiday parties.
Company retreats.
Team-building events.
Town halls.
Employee recognition events.
Social events, such as birthdays and baby showers.
Other best practices include:
Do not assume that calling a worker an "independent contractor" instead of an "employee" will determine the worker's status.
Do not assume that issuing a Form 1099-NEC instead of a W-2 makes the worker an independent contractor.
Do not assume industry practice satisfies the requirements for independent contractor classification. Entire industries (construction, for example) are often the target of enforcement efforts.
Use caution when policies, such as headcount freezes, may result in managers using independent contractors to fill open positions.
Presenter Notes:
As with other independent contractor situations, whether on-demand workers are properly classified as independent contractors depends on the facts of the case, the tests applied, the applicable federal, state, or local law, and the jurisdiction. For example, some courts have found that Uber drivers are employees, while others have concluded they are independent contractors.
One challenge is that the on-demand economy involves a new working relationship, where customers and workers are paired through an online platform or app provided by a third-party. The current tests for independent contractor status may have made sense in manufacturing or office settings, but they can be difficult to apply in this new environment.