Independent No More: The Crackdown on the Use of Independent Contractors

IRS 1779From Spilman Thomas & Battle, PLLC and JDSupra — “federal courts use an “economic realities” test to determine whether an individual is an employee or independent contractor under the FLSA. Depending on the state in which a business is located, state courts may use a similar test or a “right-to-control” test to determine whether an individual is an employee or an independent contractor under the applicable state wage and hour law. One way for a company to evaluate whether an individual is classified correctly is to use the framework provided by the IRS to determine whether an individual is an independent contractor or employee. IRS Publication 1779 describes three categories of inquiry to answer this question:

Behavioral Control:

This category of inquiry focuses on the right to control how the work is to be performed. Some of the questions to review with individuals in your company are:

  • Who has the right to supervise the work?
  • Who provides the equipment and supplies?
  • Whether the individual can hire helpers or “subcontract” the work?
  • Who controls the timing of when the work is to be completed?

One other question relates to whether training on company practices and procedures is required to perform the work. Independent contractors should not need training to perform the services they provide to a company, while employers are expected to provide training to many categories of employees.

Financial Control:

This category of inquiry focuses on the financial control in the relationship. Questions here include:

  • Looking at whether the individual has a significant investment in his or her work, as opposed to just working for a paycheck;
  • Whether the individual is reimbursed by the employer for business expenses (employees are typically reimbursed while independent contractors treat them as a business cost); and
  • Whether the individual has an opportunity for profit or loss based upon the quality and/or quantity of work performed.

Relationship of the Parties:

This category of inquiry focuses on other factors in the relationship, such as:

  • Whether there is a written contract between the individual and the company; or
  • Whether the individual receives any benefits from the company. Independent contractors should have a written contract with the company and should not receive any benefits other than the consideration set forth in the written contract.

Even if your state has not enacted specific penalties for misclassification of workers, existing financial ramifications for misclassification are severe…”

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