Independent Contractors v. Employees
In the wake of the COVID-19 pandemic, a large percentage of the U.S. workforce began to work from home and continue to do so. This three-part blog series will address common issues employers face as many workers continue to telecommute, and more organizations consider the long-term benefits of allowing employees to work remotely. Telecommuting presents employers with unique compliance issues as they attempt to develop policies that comply with federal wage and overtime laws as well as laws requiring reasonable accommodations for individuals with disabilities. This installment will consider the distinction between employees and independent contractors, which is essential to understanding who is protected by labor and employment laws like the Fair Labor Standards Act (FLSA) and the Americans with Disabilities Act (ADA).
When making this determination, consider the amount of control the payer has in the completion of a project. An independent contractor is self-employed. In other words, the payer has the right to control or direct only the result of the work, not what will be done or how it will be done. An employer controls the details of how an employee’s services are performed. This applies even if the employee is given freedom of action.
The IRS lists three categories of information used by courts when determining whether an individual is an employee or independent contractor: behavioral control, financial control, and type of relationship. This list is not exclusive, and no single factor alone is determinative.
Behavioral Control. Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial Control. Are the business aspects of the worker’s job controlled by the payer? Are expenses reimbursed? Who provides the worker with tools and supplies necessary to complete the work?
Type of Relationship. How do the business and the worker perceive their relationship? Does the worker receive benefits? Are the worker’s services directly related to the core work of the business?
If the company exercises behavioral or financial control over a worker, the worker is likely an employee. When considering the type of relationship between the company and a worker, “permanency of the relationship” should also be considered. Independent contractors are usually brought on for the short term to carry out a set amount of work. Written contracts may show the parties’ intent as to the type of relationship and can be helpful when it is difficult to make the distinction between an employee and an independent contractor; but written agreements are not determinative. The IRS, Department of Labor and courts will look at the actual relationship between the parties.
Alternatively, where the distinction is difficult to make, the worker or employer may submit IRS Form SS-8 to the IRS for review and a definitive determination as to the worker’s classification. Form SS-8 is particularly beneficial to businesses that continually hire the same type of workers to perform a particular service.
In the wake of the COVID-19 pandemic, many businesses are experiencing financial difficulty and must consider potential solutions to keep employees working while also cutting back on overhead costs. To this end, some employers will consider converting their W-2 employees to 1099 independent contractors. This solution may appeal to many employers at first glance; however, the misclassification of a worker or workers poses significant risks to employers, including backed employment taxes, tax penalties, backed overtime, and civil penalties.
Employees are covered by employment and labor laws; independent contractors are not. In the next installment in this series, we will consider the Fair Labor Standards Act (FLSA), the employees it covers, and employer compliance with federal wage and overtime laws as employees are permitted to work remotely.
If you have any questions about how the information in this article applies to your business, do not hesitate to contact us.
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