The issue of whether an individual may be classified as an independent contractor or employee is becoming increasingly confusing. In fact, in the last year Congressional hearings have been held in an effort to address the issue of misclassification of employees as independent contractors. Some States are pressuring employers to justify their classifications, as legislators are concerned that complaints are indicating that some employers are identifying their employees as independent contracts in an effort to avoid their obligations to employees (such as unemployment, Social Security and Medicare taxes, overtime and minimum wage, Workers’ Compensation and so forth.)
The financial risks a company faces when misclassifying employees as independent contractors, include charges for liabilities, penalties and fees and leaving yourself open to lawsuits related to the denial of Workers’ Compensation, Family Medical Leave Act, ERISA and other benefits, discrimination for failure to accommodate for a disability, and failing to include the individual in your employee count which resulted in your company appearing not to be required to comply with Title VII, ADA, ADEA, FMLA, WARN Act, Affirmative Action and other State and Federal employment laws, failure to retain proper tax forms for employees and confusion as to who owns the rights to the work completed.
Determining whether an individual should be classified as an employee or independent contractor can be difficult, but there are some “tests” and tools that you can reference to help ease the process. Contrary to popular belief, companies cannot just “declare” an individual as an independent contractor. Instead, they must meet certain legal tests. There are several tests that can be used to determine if an individual qualifies as an independent contractor or employee for the purposes of state or federal laws. Five of the most common tests are: IRS Factor Control (i.e. “20 Factor Test”), Economic Reality, Relative Nature of Work, ABC, and Common Law.
Which test is used depends upon the particular statutes or government agencies involved, as well as the subject matter at hand. The result may be that a worker is an “employee” under one statute, but may be considered an independent contractor under another. As you might expect, the tests are not clear-cut and are open to interpretation. However, the tests do have some significant similarities, with the main questions being: Does the company control how the work will be performed (in which case you’ve likely got an employee) or does the company simply oversee the result (which would be more favorable to a finding of an independent contractor relationship)? To learn more about which test is generally applied for a specific area or statute, visit the Data Sheets link on our website at www.NavigatorTruckInsurance.com. Please note that the tests are only guidelines and are not applicable in every situation.
An additional tool you can use to determine whether an individual is an independent contractor or employee for tax purposes is IRS Form SS-8, which can be submitted to the IRS in order to gain their direction. For a copy of the SS-8 form visit http://www.irs.gov/pub/irs-pdf/fss8.pdf.
Please remember that the information discussed here is not intended to provide specific answers to your situation. Rather, it is a reference point from which to start to deteremine if the individuals in question qualify as employees or as independent contractors. It must also be noted that Federl and State laws may vary, so it is important to check on the requirement for your State as well.
In conclusion, even after you have completed one of the tests noted above and determined that the individual is indeed an independent contractor; an independent auditor may still find that the individual is in fact an employee. However, by having a completed contract in hand (which includes the name of the individual’s business), compensating the individual for completed projects rather than ongoing work and pre-auditing the individual using the IRS Form SS-8 in addition to referencing the tests outlined above, you may be able to support your claim that the individual is an independent contractor prior to being challenged by the government, an individual, or in a court of law.
Do you have additional questions regarding the classification of workers? Visit our website at www.NavigatorTruckInsurance.com or call our office at (800) 596-TRUCK (8782) to learn more. At the Navigator Truck Insurance Agency we work hard to be accessible, helpful and result oriented.
Until next month,
Jeffery A. Moss, ARM