United States: To Be, Or Not To Be An Independent Contractor—That Is The Question.

Last Updated: November 18 2014
Article by John W. Hargrove

I often receive calls that begin with a story like this: "We had the maintenance guy do this project for us a year or two ago, and we really liked him, so we kept him on. We just 1099 him each year. No problem with that, right?" Then I say, "If you are not his employer, then who is?" Things typically spiral downhill from there.

Whether a worker is an employee or an independent contractor is critical in many different situations:

  1. What if he kills someone?
  2. What if he kills himself?
  3. What if he burns your building down?
  4. What if he brings a class action employment case against you?
  5. What if the IRS wants to see his payroll records?

Having correctly categorized a worker in anticipation of these possible scenarios can have a huge impact on any company.

Before I discuss the various tests and initiatives now taking place, I want to make two points. First, if your worker does not have an employer—a separate contractor or perhaps a staffing company—then you automatically are in the danger zone. Certainly sole proprietorships are legal, but they can be dangerous for a company using them, especially if the sole proprietorship is not set up correctly—something you might not even know. For example, does the sole proprietorship have any kind of insurance? Second, these individual contractors are much smaller than your company. So, if something goes wrong, your company is going to be a target no matter how you think the law is about independent contractors.

Now that I have mentioned the dangers, I will mention the tests that are used to determine independent contractor status. There are several, which is not surprising since the issue comes up in so many different contexts. One of the most well known is the "common law test," or the traditional 20-factor test once used by the IRS. The IRS's revised 20-factor test now features factors organized into three categories.

I like to focus on one factor in my conversations with my clients: Who has the right of control? Did your company hire this contractor to perform a discreet project which he completes with his own tools and methods and you just pay the bill when the project is completed? Or does he work for you on an annual basis, doing what you tell him to do and doing it the "company way"? Do you then pay him a set rate per hour? Maybe require him keep your shift schedule and wear a little black and gold badge that says "Mike"? Not good.

Several different government entities now are developing initiatives to attack independent contractor arrangements. One, of course, is the IRS. The IRS began its initiative several years ago and now has a Voluntary Classification Settlement Program. Another agency addressing the issue is the NLRB. More recently, at the state level, the Alabama Department of Labor signed a Memorandum of Understanding with the U.S. Department of Labor to share information discovered in audits with each other. The information gathered no doubt will make its way to the IRS because of information-sharing practices already in place between these federal agencies.

So, if your company's independent contractors have great exposure to outside parties (vehicle drivers), perform dangerous work for you (scaffold builders), or if you just have a lot of them (entertainers), there are many reasons to be careful about workers classified as independent contractors. Self audits are suggested now.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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