Are they employees or independent contractors? It’s a question that many employers grapple with as they attempt to properly classify members of their workforce.
Classification of a worker as an independent contractor can save a business money related to expenses such as workers’ compensation insurance, health benefits, and social security contributions. However, misclassification is consequential because it can lead to significant liability for the employer.
The independent contractor versus employee classification issue is a tricky one. There are no black and white guidelines to follow. However, a number of agencies, authorities, and statutes provide classification guidance. The Internal Revenue Service (“IRS”) has a 20-Factor test that courts have looked to in determining worker status. The ultimate question turns on an analysis of the behavioral control, financial control, and relationship of the parties.
While IRS 20-Factor test is commonly used, agencies may vary the test, give emphasis to different factors, or use a different test all together in the context of unemployment, worker’s compensation, ERISA, or the Department of Labor (just to name a few). As such, classifying workers can be very cumbersome for employers because classification determinations are highly fact-based.
To the extent that an employer wishes to remove uncertainty surrounding a worker’s classification, they can file IRS Form SS-8. The IRS will make a determination of the worker’s status based on the facts and circumstances. While there is no fee to request such a determination, receiving a response from the IRS could take months.
As you can see, there are many issues that an employer must consider related to the classification of its workers. When in doubt, it’s best to consult with legal counsel to avoid what could be significant liability arising from misclassification. In my next post on this subject, I’ll be discussing the consequences of misclassification, which impacts workers because they may be denied benefits and protections they are entitled to, and employers because they can be held liable for violations of federal and state laws.