independent contractors vs. employees: classification and correction

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THE KAMBER LAW GROUP

A Professional Corporation

The Law At Work.

INDEPENDENT CONTRACTOR VS.

EMPLOYEE STATUS

Deirdre Kamber Todd, [email protected]

Copyright 2012 (c) Deirdre Kamber Todd 2


Independent Contractor vs. Employee

No one ever claims to be an employee when they are actually an independent contractor.

Why?

That’s why we are here.

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Copyright 2012 (c) Deirdre Kamber Todd

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Deirdre Kamber Todd, Esq.

Areas of Practice: •Employment and Business Law•Social Media/Internet•HIPAA•Contracts •Unemployment CompensationAdmitted: Pennsylvania, New York and U.S. Supreme CourtExpert Witness: Social Media, Lehigh County Court

Deirdre Kamber DeirdreJKamberKamber Law Group @DKamberTodd

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• Generally speaking, an employee is one who is hired to work under the direction and control of the employer

• An employee does not represent the employer.

What is the difference between an I.C. and an employee?

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• An independent contractor is hired by an employer to perform a specific task.

• The key distinction between an independent contractor and an employee is that the independent contractor performs the task according to the contractor’s own methods – the contractor is not controlled with respect to the job performance

What is the difference between an I.C. and an employee?

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Employee Status

• Classification of a hired party as an employee or agent (versus an independent contractor) will vary based on the law(s) involved and the relevant criteria


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THE AGENCY TESTS

IRS Test• 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? (these include things like how 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?


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• Level of instruction. If the company directs when, where, and how work is done, this control indicates a possible employment relationship.

• Amount of training. Requesting workers to undergo company-

provided training suggests an employment relationship since the company is directing the methods by which work is accomplished.

• Degree of business integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.

• Extent of personal services. Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.

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IRS 20 Factor Test


• Control of assistants. If a company hires, supervises, and pays a worker's assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.

• Flexibility of schedule. People whose hours or days of work are dictated by a company are apt to qualify as its employees.

• Continuity of relationship. A continuous relationship between a company and a worker indicates a possible employment relationship. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential projects.

• Need for on-site services. Requiring someone to work on company premises—particularly if the work can be performed elsewhere—indicates a possible employment relationship.

IRS 20 Factor Test


• Method of payment. Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.

• Sequence of work. If a company requires work to be performed in specific order or sequence, this control suggests an employment relationship.

• Requirements for reports. If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.

• Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.

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IRS 20 Factor Test


• Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.

• Provision of tools and materials. Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.

• Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.

• Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.

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IRS 20 Factor Test


• Control over discharge. A company's unilateral right to discharge a worker suggests an employment relationship. In contrast, a company's ability to terminate independent contractor relationships generally depends on contract terms.

• Availability to public. If a worker regularly makes services available to the general public, this supports an independent contractor determination.

• Right of termination. Most employees unilaterally can terminate their work for a company without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.

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IRS 20 Factor Test


According to the IRS• Businesses must weigh all these factors when determining

whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

• http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

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According to the US DOL

• The Supreme Court has said that there is no definition that solves all problems relating to the employer-employee relationship under the Fair Labor Standards Act (FLSA).

• The Court has also said that determination of the relation cannot be based on isolated factors or upon a single characteristic, but depends upon the circumstances of the whole activity.

• The goal of the analysis is to determine the underlying economic reality of the situation and whether the individual is economically dependent on the supposed employer.

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According to the US Supreme Court

The factors that the Supreme Court has considered significant:

1. The extent to which the worker's services are an integral part of the employer's business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business' overall process of production? Does the worker supervise any of the company's employees?)

2. The permanency of the relationship (i.e. how long has the worker worked for the same company?)

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3. The amount of the worker's investment in facilities and equipment (examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?)

4. The nature and degree of control by the principal (Examples: who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?);

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4. The worker's opportunities for profit and loss (Examples: did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?); and

5. The level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (Examples: does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).

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Pa Dep’t of L&I (UC LAW)• In order to be excluded from coverage, the person who performs

the services must meet two conditions pursuant to Section 4(l)(2)(B):

– The individual must be free from control or direction over the performance of the services involved, and

– The individual is customarily engaged in an independently established trade, occupation, profession or business.

• Only if both of these conditions are met to the satisfaction of the Department will the relationship be regarded as an "independent contractor." Unless and until those criteria are met, the services will be "employment" subject to the coverage of the UC Law.

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Pa Dep’t of L&I (UC LAW)

The following items are not conclusive in determining "independent contractor" status:• Employer designation, either verbally or in writing, that an

individual is an "independent contractor"; • Statement by an individual that they are an "independent

contractor"; • Issuance of a Federal Form 1099. • A written agreement does not prohibit an examination of the facts

to determine whether the performance of the services is subject to control or direction of the employer. If the examination shows either the exercise of or the right to exercise such control or direction, then the worker would be considered an employee and not an independent contractor.

• It is immaterial if the services are performed on a full-time, part-time or casual basis.

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Pa Dep’t of L&I (UC LAW)• Issues surrounding "independent contractor" status normally arise

out of random employer audits or unemployment claims filed by individuals who assert they were employees rather than "independent contractors."

• The Office of UC Tax Services randomly selects employers for audit to verify compliance with the UC Law.

• If issues arise concerning employee status such as those listed, an employer should have sufficient documentation to support the reasons for classifying an individual as an "independent contractor."

• The Department will use all available information to determine a worker’s status.

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Pa Dep’t of L&I (UC LAW)• The presumption of the UC Law confers automatic employee

status unless and until it is proven otherwise to the satisfaction of the Department.

• Examples of relevant documentation would include copies of the individual’s preprinted invoices, business forms and stationery, Federal and State tax ID numbers, business telephone directory listings, public advertisements soliciting business, Articles of Incorporation and leases on business properties.

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Other Issues

• Non-competition

• Advertising On Facebook and other Social Media (i.e. Morse v. Mer)

• Contracts

• Opening Door To Larger Issues

• Back Taxes, Wages, UC, WC, Etc.


VSCP

• The IRS launched a national research project in which it sent thousands of audit letters to employers.

• The IRS signed an MOU with the U.S. Department of Labor to share information between them to reduce misclassification.

• Employers may now reclassify independent contractors as employees and limit the resulting federal payroll taxes for their most recent tax year, plus avoid related penalties and interest for prior years, under an IRS program announced Wednesday.

• In Announcement 2011-64, the IRS outlined its new Voluntary Classification Settlement Program (VCSP). ®

http://www.irs.gov/pub/irs-drop/a-11-64.pdf


VSCP

• Employers can apply for the program using Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

• Unlike an existing settlement program for employers under an IRS examination, the VCSP allows eligible taxpayers to voluntarily enter into an agreement with the IRS.

• To participate, employers must submit an application and agree to prospectively treat their workers or a class or group of workers as employees in future tax periods.

• Employers must also agree to extend the period of limitation on assessment of employment taxes for three years three years.


VSCP

• Employers will pay 10% of the employment tax liability otherwise due for the most recent tax year, which will not be subject to interest or penalties.

• The IRS does not conduct an employment tax audit with respect to the employer’s worker classification for prior years.

• Employers whose worker classification has been previously audited must have complied with results of the audit. Also, employers must have consistently treated workers as nonemployees, for whom they must have filed all required Forms 1099 for the previous three years.


VSCP

• The employment tax liability for the most recent year is determined under the reduced rates of IRC § 3509, which provides that: – failure to deduct and withhold taxes arising from a worker

misclassification, the employer’s liability for the employee’s portion of FICA tax is limited to 20% of the normal employee FICA tax.

• This percentage is doubled for disregard or willful neglect of reporting requirements.

• To be eligible for the program, employers must not currently be under audit by the IRS, the Labor Department or a state agency concerning worker classification.

Copyright 2012 (c) Deirdre Kamber Todd

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Questions?Comments?

The Kamber Law Group, P.C.

Deirdre Kamber Todd, [email protected]

1275 Glenlivet Drive, Suite 100Allentown, PA 18106

Tel: 484.224.3059 Fax: 484.224.2999

independent contractors vs. employees: classification and correction

Business

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company control

sequence of work

type of relationship

days of work