Many employers believe that labeling a worker “independent contractor” will end the classification inquiry. The inquiry, however, will reach beyond definitions included in a contract. Whether a worker is properly classified as an independent contractor is based on multiple factors. Employers should pay heed to increased enforcement-and make sure workers are accurately classified. Alas, the standards for determining whether a worker is properly classified as an employee or independent contractor vary between federal and state law. (This article discusses federal law.)

Courts consider particular factors–may guide an employers’ assessment of worker classification. Courts look at the “economic realities” test to determine whether a worker qualifies as an employee under the Federal Labor Standards Act. This test includes:

* The extent to which the services rendered are an integral part of the principal’s business;

* The length of the employer-employee relationship and how easily it can be legally terminated;

* The amount of the contractor’s investment in facilities and equipment;

* The nature and degree of the principal’s control over the worker;

* The contractor’s opportunities for profit and loss;

* The amount of initiative, judgment or foresight in open market competition required for the success of the claimed independent contractor;

* The worker’s degree of independent business organization and operation;

* Whether the worker can be discharged at anytime, and can choose whether or not to come to work without fear of losing employment;

* Whether the worker controls the hours of employment; and

* Whether the work is temporary or permanent.

The IRS also has a separate standard–formerly the “Twenty Factor” test to determine who is an employee or an independent contractor for tax purposes. The test focuses on three main categories:

* Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

* Financial: Are the business aspects of the worker’s job controlled by the payer (including factors such as how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?

* Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Again, the nature of the work will help define the relationship. When work is considered integral to the business, it is more likely that the person is an employee. On the other hand, work that cialis cheap is temporary and not integral may imply independent contractor status.

Employers who mistakenly classify workers may be liable for a plethora of obligations, such as unpaid unemployment insurance, workers’ compensation, social security, tax withholdings, temporary disability, minimum wage and overtime.

Employer Tax Liability

The worker’s employment status shapes the employer’s tax liability. Should employers misclassify a worker as an independent contractor, liability may loom for past taxes, including FICA and federal unemployment tax, social security tax, and workers compensation/disability premiums to a State Insurance Fund.

Additionally, pending federal legislation would significantly increase employer penalties in the event of misclassification. The Employee Misclassification Prevention Act seeks to amend the Fair Labor Standards Act, so that worker misclassification is a violation of federal law. The act also compels employers to maintain records reflecting hours worked and wages paid to independent contractors.

Employers who hire independent contractors should promptly audit their independent contractors to ensure that they can withstand a government agency’s investigation or a worker’s lawsuit.

In conducting a thorough audit, employers would be wise to do the following:

* Analyze each exempt job classification as well as each independent contractor position, including in collaboration with individual workers holding those positions;

* Document the justification for finding that the workers are properly classified as exempt or independent contractors, citing the above-mentioned factors as applicable;

* Maintain records demonstrating the analysis of the classifications;

* Provide records to workers so that the workers can assess whether they agree with the classification analysis; and

* Conduct management training to ensure that managers are appropriately trained to understand the discrepancies between exempt and non-exempt employees and independent contractors.

Author Bio: Written by Eli M. Kantor & Zachary M. Cantor, Attorneys at Law, in private practice in Beverly Hills, California. They represent employers and employees in all aspects of labor, employment and immigration law. Contact Eli at (310) 274-8216 or visit www.beverlyhillsemploymentlaw.com and www.beverlyhillsimmigrationlaw.com.

Category: Business/Human Resources/Labor Relations
Keywords: employment law, independent contractor status