Use caution when you call workers “independent contractors”
Employers who have tried calling employees “independent contractors” in an effort to avoid withholding wages for taxes, social security, and unemployment insurance, need to use caution. The Internal Revenue Service (IRS) imposes severe penalties upon businesses if a worker is misclassified as an independent contractor, rather than an employee.
The U.S. Department of Labor (DOL) developed a six-part test to determine if a worker can be categorized as an independent contractor or an employee.
- Is the work an integral part of the employer’s business?
For example, a lawyer doing work for law firm may have to be treated as an employee rather than an independent contractor, while the same lawyer providing services for other business enterprises would likely be treated as an independent contractor.
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
According to the DOL, this test is unaffected by the ability to work more hours, but is affected by the worker’s opportunity for profit or loss related to the worker’s managerial skill.
- How does the worker’s relative investment compare with the employer’s investment?
The DOL emphasized that a worker’s investment should not be considered in isolation, but rather compared to the investment an employer makes to the overall business. For example, if the worker is an accountant and brings his own computing and calculating equipment, office equipment, such as ledger paper, and other office supplies necessary to perform his or her job, he or she will more likely be treated as an independent contractor than an employee.
- Does the work performed require special skill and initiative?
A worker’s skill set, judgment, intuition and independence prevail over technical skill in determining whether the worker is economically independent.
- Is the relationship between the worker and the employer permanent or indefinite?
The more permanent a worker performs services for an employer, the more likely the worker is an employee, albeit a temporary employee or a part-time employee.
- What is the nature and degree of the employer’s control?
The more independence, judgment, and reliance upon developed skill-sets acquired from experience, learning, or education, with the ability to exercise independent managerial and administrative judgment in the way the job will be performed, favors treatment as an independent contractor.
There are significant penalties for improperly classifying an employee as an independent contractor. The employer can be liable to the worker for back overtime for a two-year period or for three years if the misclassification is deemed willful.
The law firm of Cummings, McClorey, Davis & Acho, P.L.C. is available to assist businesses with any questions or concerns regarding how to appropriate categorize their workers.
Ronald G. Acho is a co-founder of CMDA where he concentrates his practice on labor, employment, business, and real estate law. He can be reached at (734) 261-2400 or firstname.lastname@example.org.