Employee or Independent Contractor?
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Worker misclassification can cost your company big.
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Determining Whether the Individuals Providing Services are Employees or Independent Contractors
According to the IRS, in determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
IRS Common Law Control Test
Facts that provide evidence of the degree of control and independence fall into three 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? (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?
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.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
20 Common Law Factors from Rev. Rule 87-41
Each common law factor can weigh in favor or against classifying a worker as an employee. No one factor is more important than another and some factors cut both ways. The more factors that weigh in favor of the employer having control over the worker, the more likely the worker should be classified as an employee.
- Services Rendered Personally
- Hiring, Firing, and Paying Assistants
- Continuing Relationship
- Set Hours of Work
- Full Time Required
- Doing Work on Employer's Premises
- Order or Sequence Set
- Oral or Written Reports
- Payment by Hour, Week, Month
- Payment of Business/Travel Expenses
- Furnishing of Tools and Materials
- Significant Investment
- Realization of Profit or Loss
- Working for More Than One Firm at a Time
- Making Service Available to the General Public
- Right to Discharge
- Right to Terminate
DOL Economic Reality Test
Department of Labor Employment Relationship under the FLSA
In order for the Fair Labor Standards Act's (FLSA) minimum wage and overtime provisions to apply to a worker, the worker must be an “employee” of the employer. The FLSA defines “employ” as including to “suffer or permit to work.” This is a very broad definition.
Workers who are economically dependent on the business of the employer, regardless of skill level, are considered to be employees, and most workers are employees. Independent contractors are workers with economic independence who are in business for themselves.
“Economic realities” factors are helpful guides in resolving whether a worker is truly in business for himself or herself. Employers can require (or allow) employees to work and who can prevent employees from working. The Supreme Court has indicated that there is no single rule or test for determining whether an individual is an employee or independent contractor for purposes of the FLSA. The Court has held that the totality of the working relationship is determinative, meaning that all facts relevant to the relationship between the worker and the employer must be considered.
This is similar to the IRS rule above.
Department of Labor Six Factor Totality of Circumstances Test
The 6 factor Economic Realities test is a totality of the circumstances test, similar to the IRS common law control test. The more that these 6 factors weigh in favor of the employer having control over the worker, the more likely the worker should be classified as an employee.
- The extent to which the work is performed is an integral part of the employer’s business.
- Whether the worker’s managerial skills affect his or her opportunity for profit and loss.
- The relative investments in facilities and equipment by the worker and the employer.
- The worker’s skill and initiative.
- The permanency of the worker’s relationship with the employer.
- The nature and degree of control by the employer.
Florida Reemployment Assistance Program Law
Chapter 443, Florida Statutes, governs whether services performed constitute employment subject to the Florida Reemployment Assistance Program Law.
This law provides that employment includes service performed by individuals under the usual common law rules applicable in determining an employer-employee relationship.
The common law rules look primarily at the following 10 factors of the working relationship to determine if the worker is an employee or an independent contractor.
- The extent of control which (by agreement between the employer and the worker) the business may exercise over the details of the work.
*This is the most important factor of the test
- Whether the one employed is engaged in a distinct occupation or business.
- Whether the work done in a certain locality is usually done under the direction of the employer or by a specialist without supervision.
- The skill required in the particular occupation.
- Whether the employer or the worker supplies the instrumentalities (for example: equipment, vehicle, materials), tools, and the place of work for the person doing the work.
- The length of time the person is employed.
- The method of payment, whether by the time or by the job.
- Whether the work is a part of the regular business of the employer.
- Whether the parties believe they are creating the relationship of employer and employee.
- Whether the hiring party is or is not a business.
Consequences of Worker Misclassification
What are the penalties for misclassifying an employee as an independent contractor?
It is a FELONY in Florida to deliberately misclassify your employees.
Aside from possible jail time for deliberate misclassification, even if your company mistakenly misclassifies an employee you can be subject to consequences in the following areas:
- Wage and Hour Law
- Employment Taxes
- Employee Benefits
- Worker's Compensation
Worker misclassification can lead to overtime liability, unpaid break liability, retroactive benefits liability, excise penalties, unpaid tax liability, late penalties, potential audits, retroactive premium payments, coverage penalties, uninsured losses, and more.
How can I better protect my company from worker misclassification penalties?
If you don't invest in risk management, it doesn't matter what business you're in, it's a risky business. - Gary Cohn
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RISK MANAGEMENT AND MITIGATION
Our Virtual Corporate Counsel℠ services provide your company with a risk management protocol. We look at best HR practices within your industry, analyze current employee and independent contractor agreements, review your insurance coverage to insure against gaps in your coverage all to better mitigate risk. There's never a way to 100% guarantee your company won't get sued, but your company can prevent possible litigation by following proper practices and be prepared for any complaints or actions that may arise out of your hiring and payroll practices.
How Can I Determine if a Worker is an Employee?
Florida has put out an Independent Contractor Analysis Form that asks specific questions regarding the nature of the relationship to the worker. Click the link above to download the form. You can fill out the form and email it to us at Info@TaftStreetLaw.com and we will help you evaluate.