Posted by: Garcia & Cuadra, PA | January 8, 2016

Classification of Workers: Employee Vs. Independent Contractor (Part 1 of 2)

Employee Vs. Independent ContractorThis is a question many employers ask themselves when doing the hiring and staffing in their business.  The answer to this question depends on the facts and circumstances on each case and varies among different employers, even within the same industry.

So-called ’employee misclassification’ has become a hot topic recently as the economy has changed and hundreds of growing businesses turn away from traditional hiring practices and rely increasingly on contract workers. Many companies in the construction, technology and other industries that depend on contract workers have said they classify workers as independent contractors because they need the workers’ specialized skills on demand instead of full time.  However, businesses are supposed to factor in several so-called “economic realities” when determining how to classify a worker.

These factors are provided (and similarly enforced) by the IRS and the Florida Department of Revenue, Reemployment Tax Division.  The IRS guidelines to determine whether the individuals providing services are employees or independent contractors are contained in the 20 Common Law Factors provided in Revenue Ruling 87-41.  These twenty factors are designed only as guides in making the determination as there are certain available exceptions, as well as preventive measures to avoid the expensive consequences in being assessed back payroll and unemployment taxes and penalties from a workers’ payroll audits in this regard.  The most salient among all these factors to evaluate in making the proper worker classification are:

  • Instructions. A worker who is required to comply with other persons’ instructions about when and how he or she is to perform the work is ordinarily an employee.
  • Payment by Hour, Week, Month. Payment by the hour, week or month generally points to an employer-employee relationship.  Payment made by the job or on straight commission generally indicates that the worker is an independent contractor.
  • Set Hours of Work. The establishment of set hours of work by the person for whom the services are performed is a factor indicating control which tends to show the existence of an employer-employee relationship.
  • Doing Work on Employer’s Premises. If the work is performed on the premises of the person or company for whom the services are performed, that factor suggests control over the worker.  Work done off the premises of the person or company receiving the services, such as the office of the worker, indicates some freedom from control.  Many times control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required.
  • Furnishing of Tools and Materials. The fact that the person for whom the services are performed furnishes significant tools, materials and other equipment tends to show the existence of an employer-employee relationship.
  • Making Services Available to the General Public. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.
  • Right to Discharge. The right to discharge a worker is a factor indicating that the worker is an employee, and the person possessing the right is an employer.  An independent contractor cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
  • Right to Terminate. If the worker has the right to end his or her relationship with the person for whom the services are performed at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship.

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