Are your independent contractors actually employees? Guidance from the IRS and DOL.
The IRS focuses on the following three “common law rules” to distinguish independent contractors (IC) from employees:
- 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?
The Department of Labor (DOL) Wage and Hour Division (WHD) provides a bit more guidance to employers with the following six factors. Important to note the DOL also states that “no one set factors is exclusive”, depending on a “number of economic realities”:
- The extent to which the work 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.
A DOL commissioned survey suggests 10 to 30 percent of businesses misclassify employees as Independent Contractors, resulting in a number of individuals without employee benefits or protections. The WHD has called this issue “one of the most serious workplace issues within the US”. As a solution, the IRS and WHD teamed up to form the DOL Misclassification Initiative. To date, 37 state agencies have signed a Memorandum of Understanding to both share information and enforce issues related to misclassification.
Has your state signed an agreement with the IRS? Access the interactive map here. Need help making sure your employees and Independent Contractors are correctly classified? Contact a Culture Engineer today by clicking here! Also, stay up-to-date with workplace topics and tips by following us on Twitter @Culture_Ngineer.