Independent Contractor v. Employee Sarah Phaff Constangy, Brooks & Smith, LLP E-mail: sphaff@constangy.com 2852391.1

Why Should You Care? Jury Awards $13 Million in Disability Discrimination Case (Las Vegas, Nevada 1999) Jury Awards $30.675 Million Verdict in Age Discrimination Case (Youngstown, Ohio 2001) Mitsubishi Motors Settles Sexual Harassment Lawsuit for $34 Million (Normal, Illinois 1999) 2852391.1

Why Should You Care? Coca Cola Settles Race Discrimination Lawsuit for $192.5 Million (Atlanta, Georgia 2000) Government Will Pay $508 Million to Settle Sex Discrimination Suit (CNN – March 22, 2000) 2852391.1

Business Week 2852391.1 4

Biggest Common Misconception: I have an Independent Contractor! There are different state and federal tests for determining Independent Contractor status: The IRS Test The “Economic Realities” Test Test for unemployment compensation coverage Various tests used under state workers compensation laws 2852391.1

Independent Contractors: Common Themes Among the Tests Intent based on written agreements or tax documents. Level of control employer has over means and method of work. Level of dependence by worker on employer for livelihood. Whether worker is integrated into core of employer’s business. 2852391.1

Employee OR Independent Contractor? 2852391.1

IRS Criteria Old Approach: 20 different factors New and Improved Approach: Behavioral Control Financial Control Relationship of the Parties 2852391.1

Behavioral Control A worker is an employee when the business has the right to control the WORKER. This DOES NOT mean that the business actually directs or controls the way the work is done. As long as the employer retains the right to control the worker, the worker is an employee. 2852391.1

Examples of Behavioral Control Training: If a worker receives extensive instructions on how work is to be done, this suggests that the worker is an employee. Instructions include, but are not limited to: How, when, or where to do the work. What tools or equipment to use. What assistants to hire to help with the work. Where to purchase supplies and services. 2852391.1

The greater the control over the worker’s everyday activities the more likely the worker will be deemed an employee. If a worker receives less extensive instructions about what should be done, but not how it should be done, the worker may be an independent contractor. The amount of control needed to establish employee status varies among different jobs. Even if NO instructions exist, behavioral control may still exist if the employer has the right to control or direct the work. 2852391.1

Financial Control Does the worker have a right to direct or control the business part of the work? Control of the money is a factor in determining independent contractor status. 2852391.1

Financial Control Factors Significant Investment If the worker has a significant monetary investment in the work, she may be an independent contractor. There is no “Dollar Amount Test” to make this determination. Even if a significant investment does not exist, a worker may still be considered an independent contractor. 2852391.1

Financial Control Factors Expenses If the worker is not reimbursed for some or all business expenses then he may be an independent contractor. The greater the business expenses, the greater likelihood an individual will be considered an independent contractor. 2852391.1

Financial Control Factors Extent to which the worker makes their services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location and are available to work in the relevant market. 2852391.1

Financial Control Factors Pay An employee is generally guaranteed a regular wage. This is true even when this guaranteed wage is supplemented by a commission. An independent contractor is usually paid a flat fee for the job. Receipt of a steady paycheck is a clear indication of employee status. However, some independent contractors may have an hourly rate (e.g., lawyers). 2852391.1

Financial Control Factors Opportunity for Profit or Loss If a worker can realize a profit or incur a loss, this suggests that the worker may be an independent contractor. 2852391.1

Relationship of the Parties The final category is dependant upon how the business and the worker view their relationship. 2852391.1

Relationship Factors Employee Benefits Providing benefits such as insurance, pension, paid leave, sick leave benefits, or vacation is an indication the worker is an employee. If a worker does not receive these benefits, then it is an indication the worker is an independent contractor. However, non-receipt of these benefits is not dispositive of independent contractor status. 2852391.1

Relationship Factors Written Contracts A written contract may show what both the worker and the business intend. This may be very significant if it is difficult to determine status based on other factors. 2852391.1

Relationship Factors Permanency of the relationship If the relationship is expected to continue indefinitely, the worker is likely an employee. If the relationship is for a specific project or set period of time, the worker is likely an independent contractor. Services as regular business activity If a worker provides services which are a key aspect of the business’ regular business activity, the worker is likely an employee. Example – The business presents the worker’s work as that of the business, not of the worker. 2852391.1

Economic Realities Test Used under the Fair Labor Standards Act Dependence of the worker on the business. Portion of salary gained from that business. Other Factors Level of skill Intent of the parties Payment of social security taxes and benefits 2852391.1

Tax Consequences 2852391.1

Employee Employers must pay: State Unemployment Taxes Federal Unemployment Taxes Social Security Tax Medicare Taxes Workers’ Compensation Premiums Disability Premiums 2852391.1

Employee Employers must also: Tax benefits to employee: Give the worker a W-2 Wage and Tax Statement. Tax benefits to employee: Employee may deduct unreimbursed employee business expenses on Schedule A. 2852391.1

Independent Contractor Business’ responsibility: Form 1099-MISC as a miscellaneous income report. 2852391.1

Independent Contractor Independent contractor’s responsibility: Must pay their OWN income tax. Must pay their OWN self-employment tax because the business does not withhold taxes from the contractor’s pay. May need to make estimated tax payments during the year to cover tax liabilities. 2852391.1

Independent Contractor Tax Benefits: Independent contractors can deduct business expenses on Schedule C of the income tax return. Businesses do not have to pay the taxes on the worker. 2852391.1

Pros and Cons 2852391.1

Independent Contractors Pros – Reduced Overhead Generally reduced costs in expenses, payroll, benefits and other overhead No Health Benefits Health benefits can be a significant burden on small business Work on Demand You only pay for the worker when you need the worker—leads to greater cost control 2852391.1

Independent Contractors Cons Lack of control Less commitment than an employee No fixed rates Independent contractors’ rates can very from project to project Misclassification penalties 2852391.1

Employees Pros Dedicated loyalty Multiple roles Improved work flow Employees in small businesses will often perform a variety of roles Improved work flow Priority of tasks With an employee the company gets to set the priority of tasks. With an independent contractor, this may not be the case. No concern about misclassification 2852391.1

Employees Cons Added responsibility Extra overhead Managing duties You have to make payroll as well as make your own ends meet Extra overhead Managing duties 2852391.1

Misclassification 2852391.1

Misclassifications cost federal and state governments billions of dollars in tax revenue each year. Misclassifications deprive workers of legal benefits including unemployment insurance, workers’ compensation, and fair wages and hours. 2852391.1

Consequences to the Business LIABILITIES Past taxes Liability under ERISA Health and retirement plan benefits Workers’ compensation benefits Title VII FMLA ADA ADEA Etc. 2852391.1

Conditions Employer must not have treated the worker as an employee for the purpose of employment taxes. Employer must have a reasonable basis for classification as an independent contractor. A) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer; (B) a past IRS audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or (C) long-standing recognized practice of a significant segment of the industry in which such individual was engaged. 2852391.1

Requirements Consistency in prior tax treatment The safe harbor does not apply if the taxpayer or predecessor has treated any individual holding a substantially similar position as an employee for purposes of employment taxes for any tax period after December 31, 1977. 2852391.1

Conflict with the Private Home Care Provider Regulations 2852391.1

Private Home Care Provider Regulations 2852391.1

Private Home Care Provider Regulations 2852391.1

Private Home Care Provider Regulations 2852391.1

Private Home Care Provider Regulations 2852391.1

Perks Of Being GACCP Constangy Client 2852391.1

Human Resources Reference Manual 2852391.1

Client Bulletins 2852391.1

Employer Hotline 2852391.1

Record Keeping Cheat Sheet 2852391.1

Sample Social Media Policy 2852391.1

Sample Harassment Policy 2852391.1

Questions 2852391.1