Misclassifying,Employees,Indep DIY Misclassifying Employees as Independent Contractors ... One

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DETERMINING WHETHER JOE IS EMPLOYEE OR INDEPENDENTCONTRACTORUnfortunately, as far as the various government agencies are concerned,there is not one single test that determines whether Joe is youremployee or an independent contractor. Even more difficult, it isquite possible that for the purposes of one government agency Joe isconsidered to be an independent contractor while for another he istreated as an employee.=> The IRS/Common Law "Control" TestThe IRS follows the common law "control" test for determining whethersomeone is an employee or independent contractor. This test looksat 20 factors as being indicative (and only indicative) of whetherthe person is an employee or independent contractor. The testbasically involves a balancing of these factors -- which way does thescale tip?Here are the IRS factors:1. Whether the worker can earn a profit or suffer a loss from theactivity (if so, the more likely it is that the worker is an independentcontractor).2. Whether the worker is told where to work (indicative of employeestatus).3. Whether the worker offers his or her services to the generalpublic (indicative of independent contractor status).4. Whether the worker can be fired by the hiring firm.5. Whether the worker furnishes the tools and materials needed todo the work (indicative of independent contractor status).6. Whether the worker is paid by the job or by the hour (independentcontractors are more likely to be paid by the job; employees by thehour).7. Whether the worker works for more than one firm at a time(indicative of independent contractor status).8. Whether the worker has a continuing relationship with the hiringfirm (indicative of employee status).9. Whether the worker invests in equipment and facilities (indicativeof independent contractor status).10. Whether the worker pays his or her own business and travelingexpenses (indicative of independent contractor status).11. Whether the worker has the right to quit without incurringliability (indicative of employee status).12. Whether the worker receives instructions from the hiring firm(indicative of employee status).13. Whether the worker is told how to perform the work (indicative ofemployee status).14. Whether the worker receives training from the hiring firm (indicativeof employee status).15. Whether the worker performs the services personally.16. Whether the worker hires and pays assistants (indicative ofindependent contractor status).17. Whether the worker sets his or her own working hours (indicativeof independent contractor status).18. Whether the worker provides regular progress reports to thehiring firm.19. Whether the worker works full-time for the hiring firm (indicativeof employee status).20. Whether the worker provides services that are an integral partof the hiring firm's day-to-day operations (indicative of employeestatus).It is important to note that none of the above factors are, of themselves,determinative. The IRS will balance all of the factors to determinewhich side of the equation is favored.=> Other AgenciesThe other government agencies with which you need to be concernedare:1. Your state Unemployment Compensation Board.2. Your state Workers' Compensation Insurance Agency.3. Your state Tax Department.4. Your state/federal Department of Labor.Unfortunately each state agency varies in its approach to determiningwhether a worker is an employee or independent contractor. Manystates' agencies use a statutory test focusing on just a few of the "control"test factors. You should therefore find out the factors that your state'sagencies take into account before hiring any independent contractors.Most of this information will be available on the agency's website. If not,call them and get them to send you information about their policies.PROTECTING YOURSELFOK, so you know the difference between an independent contractorand an employee, you know the advantages and disadvantages ofhiring independent contractors and you know the dangers ofmisclassification. How do you protect yourself?=> Independent Contractor AgreementFirst and foremost, arm yourself with the IRS' control test factors andthe tests used by the various government agencies in your state.Once you have that information, you can structure your arrangementswith your independent contractors accordingly. These arrangementsshould be reduced to writing, in the form of an independent contractoragreement.An independent contractor agreement should contain a description ofthe services the independent contractor is to perform, by when theyare to be performed and the amount the independent contractor isto receive in return for satisfactory service.This agreement can be very helpful evidence in proving that theworker's status was independent contractor rather than employee.Although such an agreement is insufficient by itself (if you nonethelesstreat the independent contractor as an employee the agreementwill be worthless for this purpose), if the factors weighed by the IRSunder the control test are evenly balanced, an independent contractoragreement may well tip the scales in your favor.=> ScreeningBefore hiring an independent contractor, put him or her through afew hoops first. It's a good idea to prepare some form of questionnaireto extract the sort of information you would need to be able to provein support of your argument that the worker is, in fact, an independentcontractor and not an employee. Examples of such information(courtesy of the NOLO website - http://www.nolo.com) include:1. Whether the worker has formed a legal entity for his or her business.2. Whether the worker has filed a fictitious business name (also knownas a "DBA" or "doing business as").3. The worker's business address and telephone numbers.4. The number of employees employed by the business.5. Whether the worker has any professional or business licenses.6. References from other business for whom the worker has performedservices as an independent contractor.7. How the worker markets his or her business.8. Whether the worker maintains an office separate from his or herhome.9. A description of the equipment and facilities the worker owns andwill use in the project.10. Whether the worker has business cards and stationery etc..11. A listing of the types of insurance coverage the worker hasfor his or her business.Request documents that evidence the responses to the above questions.For example, get copies of fictitious business name statements,professional and business licenses; references; business cards andstationery and insurance policies.At the end of the day, whether you hire an employee or an independentcontractor is a decision for you and your business. If you feel you canadequately protect yourself against an allegation of misclassificationthen, by all means, follow the independent contractor route if that makesmost sense to you. But if you don't feel confident in managing therelationship to protect yourself from such a charge, for your ownpeace of mind, you may be well advised to hire an employee even ifthat is more expensive up-front. After all, if you get it wrong, you'll bepaying those additional costs anyway in the form of back-taxes (andinterest and penalties to boot). Article Tags: Independent Contractors, Government Agencies, Independent Contractor, Control Test, Work Indicative