While businesses for years have often used Independent Contractors (IC’s) to avoid payroll taxes and other liabilities associated with hiring employees, often times these workers were misclassified, sometimes intentionally, sometimes not.  The Obama Administration’s initiative targeting employers that misclassify workers is changing the employment environment. Under the Administration’s and Congress’s direction, The IRS, the Labor Dept and  state government agencies are all working together to share information and coordinate enforcement of labor laws in this area. The goal of these efforts is to identify and prosecute employers who misclassify workers.  While employers may think they are saving money by classifying workers as independent contractors, if found to be non-compliant, prosecution by these multiple agencies as well as back taxes, wage and hour claims and additional fines can amount to a considerable financial burden.  How can an employers protect themselves?

See previous Advi$or article on this subject here 

Generally, federal and state courts have relied on the “economic reality test” to establish a workers classification.  Factors of that test include how much control the employer has over the worker, who made the investment in the worker’s facilities or equipment, who has the opportunity for profit or loss,  how permanent is the work and how vital is it to the operation of the business.  While sometimes judging these criteria can be a little “grey”, the government in general is more likely to rule in favor of employee status.

Organizations that wish to use the IC classification but are not comfortable giving up the control factor of that worker that the IC status requires will want to reconsider that worker’s classification right from the start. While it may not seem like the most cost effective  option at the time, in the long-term, the financial liabilities will probably be substantially less.  For those organizations that wish to use the IC status and are willing to examine the working conditions to ensure compliance, here are some areas to keep an eye on to reduce the risks:

  • Use a Independent Contractor agreement that defines the intention to establish an IC relationship and the terms of the relationship.
  • Be careful not to issue policies that define work rules, guidelines, performance standards and other policies that may imply control. These types of policies are part of normal employer/employee relationships.
  • Be careful not to provide the IC with tools or other equipment that will aid in the performance of the workers job. IC’s should be able to provide their own tools necessary to complete the task the individual was hired to perform.
  • Organizations who try to dictate who an individual can work for while they are performing work for the organization will find it difficult to justify IC status.  Along those lines, Non-Compete agreements should be avoided to maintain IC status.
  • If the IC can demonstrate their establishment of their own business entity, their own insurance, their own EIN, their own licenses, it will go along way in helping the hiring organization prove to the regulators that they are working with an IC.

In this current business environment, organizations that perform these evaluations on a regular basis in their use of IC’s will ultimately save themselves considerable effort, financial resources and simply put, other hassles.