In the past 5 years, officials from many branches of Government, from the Dept. of Labor and the IRS to Congress and the Executive branch, are more focused on workers issues, and, just as importantly, treasury revenue, than any other recent administrations. One major area of focus is on making sure that individuals are paid correctly according to the Fair Labor Standards Act. Another area is the perceived loss of government revenue due to uncollected employment taxes.

For example, numerous successful tech companies, such as MicroSoft and Google, are known for offering their employees free meals from well stocked (often gourmet) cafeterias. The employers say it is a way to attract good employees, get the best out of their employees, keep them on “campus” (thus shortening  the lunch break) and enhance company security. Because of the lavishness of the cafeterias, the IRS views the meals as a taxable fringe benefit and they are stepping up efforts to win the argument, thus increasing the amount of payroll taxes collected from these companies and their employees.

One of the primary methods government agencies are using to resolve both of these issues is ensuring employers are classifying workers correctly. The use of Independent Contractors by businesses relieves the business of complying with both labor requirements (such as the payment of OT) and employment taxes. We know the Advi$or has discussed this topic before, but we feel it is important employers clearly understand the issue and the consequences, and costs, associated with government’s continually increased efforts to enforce the classification requirements.

The issue of whether a worker is an independent contractor or employee can come into play under various federal and state laws. For example, under federal law, employers and employees are subject to employment taxes under FICA (social security taxes), and employers are also subject to unemployment taxes under FUTA. Employers are required to withhold FICA tax and Federal income tax on wage payments they make to their employees. However, these employment taxes do not apply to payments to independent contractors.

Labor regulations define an “employee” as an individual who, under common law rules, has the status of an employee. The tests used to evaluate that status, whether a worker is an independent contractor or employee, vary somewhat from state to state, but are generally comprised of a number of the following factors:

  1. The degree of control retained by the principal;
  2. Whether the principal can discharge the individual;
  3. The opportunity of the individual for profit or loss;
  4. Which party invests in work facilities used by the individual;
  5. Whether the work is part of the principal’s regular business;
  6. The permanency of the relationship;
  7. The relationship the parties believed they were creating;
  8. The provision of employee benefits;
  9. Where the work is performed; and
  10. The method and regularity of payments.

In addressing federal stipulations, the courts have found that whether an individual is a common law employee is a question of fact to be determined by applying factors similar to the first seven listed above. In addition, certain states have other tests for determining employee status for purposes of, for example, a state law wage or worker’s compensation statute. These statutes generally construe employee status more broadly than common law. You will notice that, in general, the more control by the employer, the more likely the worker is an employee. How you respond to these “tests” will help you determine worker status.

The Advi$or has noticed a continual increase in the number of articles in our payroll periodicals denoting company after company who are paying significant fines and penalties for failure to comply with worker classification and FLSA stipulations. If you have any concerns regarding how you are determining your worker status, we encourage you to contact an HR professional, such as SESCO. Or give us a call at 423-854-9042  and we will steer you in the right direction.


About Time & Pay:

Time & Pay is a professional payroll service provider located in Johnson City, TN. We service businesses of all sizes and types throughout the United States. Founded in 1992, Time & Pay provides businesses with complete payroll services , guaranteed payroll tax compliance, automated time and attendance systems and services, pay-as-you-go worker’s comphuman resource management systems and services, and more. We provide our customers with the cost effective tools you need to better manage your payroll, your employees and your business. Time & Pay’s services guarantee you will save money, time and aggravation and we back them up with the customer service you expect and deserve. Contact us today to learn why business owners throughout the country are saying:

“Time & Pay! Why would you do payroll and timekeeping any other way?”

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