Classified: Employees or independent contractor?

The number of employees a company has and the number of hours worked now take on more significance for business owners since federal healthcare coverage requirements are based on those variables. As a result, some employers are tempted to try to classify workers as independent contractors rather than employees.  The Department of Labor and the IRS are very carefully scrutinizing employers to be sure that all workers are appropriately classified as employees unless they meet the requirements for independent contractor status.

Bear in mind that what the worker tells you about how they prefer to be classified does not determine their status.  It is not uncommon for someone to tell you they prefer to be an independent contractor (so they don’t have any tax withholding) and then later, when they want to file for unemployment, Social Security, or other benefits they’ll throw you under the bus.

The IRS applies several factors to determine if a person on the payroll is an employee, whose professional functions are directed and controlled by the employer, or if the worker is an independent contractor who simply receives a check in exchange for services.

For instance, a worker who must comply with instructions about when, where and how he or she is to work is ordinarily an employee. The control factor of an employer is present if the business has the right to make the worker follow instructions.

Training requirements and demands that the employee attend company meetings is another strong indicator of an employer-employee relationship. However, providing orientation and information about company policies does not necessarily indicate the person is an employee versus an independent contractor.

Another point of consideration is whether work is done off-premises, such as at the worker’s office, which indicates some freedom from control.

Payment by the hour, week or month generally points to an employer-employee relationship, unless this method is simply a convenient way of paying a lump sum agreed upon as the cost of a job. Payment by the job or straight commission generally indicates a worker is an independent contractor.

Relatedly, if a worker can realize a profit or suffer a loss as a result of the services provided, he or she generally is considered an independent contractor.

The IRS has many other factors that it considers when determining whether or not a worker is an employee or a contractor, and there is no litmus test for how many of these must be satisfied. Please call our office if you would like more information.