Workforce classification: IRS guidelines critical for review
From tax codes to wage and hour regulations, employers must be extremely diligent when it comes to classifying their workforce. Business owners need to have a clear understanding of what determines whether the individuals providing services are employees or independent contractors, and as the tax season approaches, it’s a good time for businesses to review the IRS guidelines that distinguish between these two types of workers.
The following criteria should be used to classify independent contractors and employees:
- Behavioral Control:
- If an employer trains and directs work, including hours of work, what tools or equipment to be used, specific tasks to be performed and how the work is to be done, the worker is likely an employee. If the worker can set his or her own hours and works with little or no direction or training, he or she is probably an independent contractor.
- Financial Control
- This factor includes how the worker is paid, whether the worker may work for others at the same time, and whether the worker can incur a profit or loss. A worker who is paid a salary, is restricted from working for others, and who does not participate in company profits or losses, is probably an employee.
- Type of Relationship
- The presence of a specific contract may indicate an independent contractor, but this factor alone is not controlling. If the worker is entitled to benefits, this would indicate an employment relationship. Another factor would be the type of work the person does; if it is directly related to the company’s core work, he or she is probably an employee. For example, a maintenance worker would not be doing ‘company’ work if he or she were working for a bank.
It is important to note that the IRS assumes that a worker is an employee and it can be tricky to make the call, so If you are unsure whether to classify a worker as an independent contractor or employee, you can file a Form SS-8 (PDF) to request a determination.
Supreme Court Decisions Relating to Independent Contractor Status
The Department of Labor relies on Supreme Court decisions on independent contractors. These decisions reveal that there is no one single rule or test for independent contractor or employee for purposes of FLSA. The Court has held that it is the total activity or situation which controls. Among the factors considered significant are:
- The extent to which the services rendered are an integral part of the principal’s business
- The permanency of the relationship
- The amount of the alleged contractor’s investment in facilities and equipment
- The alleged contractor’s opportunities for profit and loss
- The amount of initiative, judgment, or foresight in in open market completion against others is required of the claimed independent contractor
- The degree of independent business organization and operation.
Other factors deemed immaterial to the question:
- The place where work is performed
- The absence of a formal employment agreement
- Whether the alleged independent contractor is licensed by the state/local government
- The time or mode of pay does not control the determination of employee status.ms
Employers who mis-classify their workers face serious consequences, especially in light of PPACA reporting laws (Employer Shared Responsibility, Play or Pay, etc.) Both WGA’s Property and Employee Benefits Groups have extensive knowledge on this issue and can assist companies with navigating the complexities that accompany these laws. Contact your WGA representative with questions and to learn more.
About the Author
Bruce MacDougall is a Senior Vice President in the Property & Casualty group at WGA and leader of the Private Client Group. His responsibilities at WGA include developing relationships and serving as a resource for WGA clients in all areas of property and casualty insurance brokerage and risk management consulting.