Misclassification is “very hot,” says Attorney Dinita James, and the DOL is doing “directed” investigations, that is, visiting places where there hasn’t been a complaint.
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The agency is also singling out certain industries in its search for companies violating rules governing misclassification of independent contractors. For example, says James, they are looking at electrical contractors. In investigations of contractors in construction, most companies were found to be in violation, she says.
The Department of Labor (DOL) is checking such statistics as the ratio of W-2s to 1099s. When the 1099 form is issued to an individual social security number instead of an entity, there will be intense scrutiny.
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Summary of IRS 20-Factor Test
Here, from Compensation.BLR.com®, is information about the IRS’s 20-factor test that is used to determine whether sufficient “control” is present to establish an employer-employee relationship or an independent contractor-client relationship.
According to the IRS, these factors should be considered guidelines. Not every factor is applicable in every situation, and the degree of importance or “weight” of each factor varies depending on the type of work and individual circumstances. However, all relevant factors are considered by the IRS in probing the relationship; no one factor is decisive.
The IRS traditionally has maintained that it doesn’t matter if a written agreement takes a position with regard to any factors or state that certain factors do not apply, if the facts indicate otherwise. A contract designation that the parties are entering into an independent contracting agreement and the service provider is an independent contractor, in and of itself, is never sufficient evidence for determining worker status.
So, for tax collection purposes, the IRS appears to have a strong incentive in finding employee status even in instances when the parties enter into a written contract that says otherwise.
Terms: “Worker” as used in this chart refers to the erstwhile independent contractor (the service provider); “Company” refers to the service recipient, i.e., the client or business hiring or purchasing the services rendered by the independent contractor.
Recommendation: If one or more factors under the “Employee Status” heading are true, consider either restructuring your arrangement with the worker or converting the relationship to employer-employee status.
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|
Factor |
Indicates Employee Status |
Indicates Independent Contractor Status |
|
Instructions |
Worker is subject to control of and must comply with company’s significant instructions. |
Worker determines when, where, and how the work is performed. |
|
Training |
Worker is required to undergo on-the-job training. |
Worker is already highly skilled and receives no training from company. |
|
Integration |
Worker’s services are an integral part of the overall business; worker’s services parallel work done by regular full-time employees. |
Worker’s services are not integral to the success or continuation of the business; worker performs services separate and distinct from work done by regular full-time employees. |
|
Services Rendered |
Worker must render the services personally. |
Worker need not render services personally and has helpers. |
|
Hiring/Super-vision |
Company hires, supervises, and pays workers. |
Worker hires, supervises, and pays helpers under a contract requiring him or her to provide materials and labor. |
|
Employment Relationship |
Continuing relationship between worker and company |
Relationship exists only until specific project is completed. |
|
Work Hours |
Company sets work hours. |
Worker sets his own work hours. |
|
Full-time Effort |
Worker must devote full-time effort to company. |
Worker determines when and for whom he or she chooses to work. |
|
Location |
Work is performed on company premises. |
Work is performed elsewhere. |
|
Order/ |
Company sets order or sequence of work performed. |
Worker follows his own pattern or schedule of work. |
|
Reports |
Worker must submit regular oral or written reports. |
Regular reports are not required. |
|
Payment Method |
Worker is paid hourly, weekly, or monthly. |
Worker is paid by the job or by straight commission. |
|
Expense Reimbursement |
Company reimburses worker for business or traveling expenses. |
Worker pays his or her own expenses. |
|
Tools and Materials |
Company provides worker’s tools and materials. |
Worker furnishes his or her own tools and materials. |
|
Significant Investment |
Worker does not invest in facilities and/or equipment used to provide services. |
Worker makes significant investment in facilities and/or equipment he or she uses in performing services. |
|
Profit or Loss |
Worker cannot make a profit or loss. |
Worker can realize a profit or loss under the contract. |
|
Employed by More than One Firm |
Worker provides services to one company. |
Worker provides services to multiple, unrelated companies at the same time. |
|
Service Availability |
Worker does not regularly make services available to the general public. |
Worker regularly makes services available to the general public. |
|
Firing |
The right to discharge is an indicator of an employer-employee relationship. |
Worker may not be fired if work is produced according to contract specifications. |
|
Quitting |
Each party has the right to terminate the relationship without incurring liability. |
Worker may terminate the relationship only upon completion of contract or breach of contract by other party. |
In tomorrow’s Advisor, we presentJames on DOL’s slapdowns, plus an introduction to the all-things-HR-in-one-place website, HR.BLR.com®.
This is an excellent article, alerting companies to the hazards of using ICs without a strategy intended to minimize IC misclassification liability. As noted in our frequently visited White Paper, http://www.pepperlaw.com/publications_article.aspx?ArticleKey=2424, there are a number of alternative ways to reduce exposure, but all of them require a thoughtful analysis, diagnosis, and plan of action. Many companies have resorted to using IC Diagnostics (TM), a proprietary process that examines whether a group of workers not being treated as employees would pass the applicable tests for IC status under governing state and federal laws, and then offers a number of practical, alternative solutions to enhance compliance with those laws. Unfortunately, in addition to the IRS 20-factor test, most states have IC tests that not only vary from federal laws but also differ from each other – even where some state IC tests appear to be similarly worded. This creates a greater challenge for companies operating nationwide or in a number of different states. The compliance alternative most frequently availed by most companies is a restructuring accompanied by state-of-the-art re-documentation and re-implementation, using 48 Factors-Plus(TM) and other proprietary tools to achieve an enhanced level of compliance. Richard Reibstein (reibsteinr@pepperlaw.com)
Remember that the IRS test isn’t the only relevant test. States, for example, may apply their own tests.