Caesar: The ides of March are come.
Soothsayer: Aye, Caesar, but not gone.
-Julius Caesar, Act III, Scene 1
On this March 15th, human-owned businesses don't need Shakespeare's
Soothsayer to warn of forthcoming trouble in the classification of
employees and independent contractors, the Federal budget does that for us. A
joint enforcement effort by the Treasury Department (home of the IRS) and the
Labor Department (home of the Wage and Hour Division, enforcers of the Fair
Labor Standards Act) to reclassify independent contractors as employees is
projected to add at least $7 billion to the government's bottom line over the
next ten years.
Business and government have wrestled over the proper classification of workers
as employees or independent contractors for years. Why? The New York Times,
in an article citing reports of almost one in three businesses misclassifying
employees as contractors, summed up the stakes this way:
Companies that pass off employees as independent
contractors avoid paying Social Security, Medicare and unemployment insurance
taxes for those workers. Companies do not withhold income taxes from
contractors' paychecks, and several studies have indicated that, on average,
misclassified independent workers do not report 30 percent of their income.
Some businesses intentionally misclassify workers. In the
process, they take advantage of those workers, gain an unfair advantage on
companies playing by the rules, and increase the tax burden on everyone. Many
more businesses, however, are victims of the subjective nature of worker
You see, there is no clear definition of "employee" in the Internal Revenue
Code. Instead, we are told to use traditional legal concepts involving control
of the worker in order to distinguish employees from nonemployees. The IRS
developed a list of 20 factors to aid in classification inquiries. For
those who love details, those 20 factors are included after the jump
at the end of this post; for the rest of you and for business owners
generally, the IRS boiled-down the 20 factors into three categories for proper
While the circumstances of each situation still need to
be considered, two facts above all others put a classification at risk of a
government challenge: One, the business has both employees and contractors
performing essentially the same duties, and two, the contractor in question was
formerly classified as an employee to do essentially the same work.
If you have either of those two facts against you or if you have questions
about the application of these factors in your business, then you could become
part of that additional $7 billion in revenue the government is counting on
from this effort. See me or your lawyer to review your situation before that
The Twenty Factors Used by the IRS
From Revenue Ruling 87-41 issued by the IRS in 1987
1. Instructions. A worker who is required to comply with other persons'
instructions about when, where, and how he or she is to work is ordinarily an
2. Training. Training a worker by requiring an experienced employee to
work with the worker, by corresponding with the worker, by requiring the worker
to attend meetings, or by using other methods, indicates that the person or
persons for whom the services are performed want the services performed in a
particular method or manner.
3. Integration. Integration of the worker's services into the business
operations generally shows that the worker is subject to direction and control.
When the success or continuation of a business depends to an appreciable degree
upon the performance of certain services, the workers who perform those
services must necessarily be subject to a certain amount of control by the
owner of the business.
4. Services Rendered Personally. If the services must be rendered
personally, presumably the person or persons for whom the services are
performed are interested in the methods used to accomplish the work as well as
in the results.
5. Hiring, Supervising, and Paying Assistants. If the person or persons
for whom the services are performed hire, supervise, and pay assistants, that
factor generally shows control over the workers on the job. However, if one
worker hires, supervises, and pays the other assistants pursuant to a contract
under which the worker agrees to provide materials and labor and under which
the worker is responsible only for the attainment of a result, this factor
indicates an independent contractor status.
6. Continuing Relationship. A continuing relationship between the worker
and the person or persons for whom the services are performed indicates that an
employer-employee relationship exists. A continuing relationship may exist
where work is performed at frequently recurring although irregular intervals.
7. Set Hours of Work. The establishment of set hours of work by the
person or persons for whom the services are performed is a factor indicating
8. Full Time Required. If the worker must devote substantially full time
to the business of the person or persons for whom the services are performed,
such person or persons have control over the amount of time the worker spends
working and impliedly restrict the worker from doing other gainful work. An
independent contractor, on the other hand, is free to work when and for whom he
or she chooses.
9. Doing Work on Employer's Premises. If the work is performed on the
premises of the person or persons for whom the services are performed, that
factor suggests control over the worker, especially if the work could be done
elsewhere.. Work done off the premises of the person or persons receiving the
services, such as at the office of the worker, indicates some freedom from
control. However, this fact by itself does not mean that the worker is not an
employee. The importance of this factor depends on the nature of the service
involved and the extent to which an employer generally would require that
employees perform such services on the employer's premises. 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
10. Order or Sequence Set. If a worker must perform services in the
order or sequence set by the person or persons for whom the services are
performed, that factor shows that the worker is not free to follow the worker's
own pattern of work but must follow the established routines and schedules of
the person or persons for whom the services are performed. Often, because of
the nature of an occupation, the person or persons for whom the services are
performed do not set the order of the services or set the order infrequently.
It is sufficient to show control, however, if such person or persons retain the
right to do so.
11. Oral or Written Reports. A requirement that the worker submit
regular or written reports to the person or persons for whom the services are
performed indicates a degree of control.
12. Payment by Hour, Week, Month. Payment by the hour, week, or month
generally points to an employer-employee relationship, provided that this
method of payment is not just a convenient way of paying a lump sum agreed upon
as the cost of a job. Payment made by the job or on a straight commission
generally indicates that the worker is an independent contractor.
13. Payment of Business and/or Traveling Expenses. If the person or
persons for whom the services are performed ordinarily pay the worker's
business and/or traveling expenses, the worker is ordinarily an employee. An
employer, to be able to control expenses, generally retains the right to
regulate and direct the worker's business activities.
14. Furnishing of Tools and Materials. The fact that the person or
persons for whom the services are performed furnish significant tools, materials,
and other equipment tends to show the existence of an employer-employee
15. Significant Investment. If the worker invests in facilities that are
used by the worker in performing services and are not typically maintained by
employees (such as the maintenance of an office rented at fair value from an
unrelated party), that factor tends to indicate that the worker is an
independent contractor. On the other hand, lack of investment in facilities
indicates dependence on the person or persons for whom the services are
performed for such facilities and, accordingly, the existence of an
employer-employee relationship. Special scrutiny is required with respect to
certain types of facilities, such as home offices.
16. Realization of Profit or Loss. A worker who can realize a profit or
suffer a loss as a result of the worker's services (in addition to the profit
or loss ordinarily realized by employees) is generally an independent
contractor, but the worker who cannot is an employee. For example, if the
worker is subject to a real risk of economic loss due to significant
investments or a bona fide liability for expenses, such as salary payments to
unrelated employees, that factor indicates that the worker is an independent
contractor. The risk that a worker will not receive payment for his or her
services, however, is common to both independent contractors and employees and
thus does not constitute a sufficient economic risk to support treatment as an
17. Working for More Than One Firm at a Time. If a worker performs more
than de minimis services for a multiple of unrelated persons or firms at the
same time, that factor generally indicates that the worker is an independent
contractor. However, a worker who performs services for more than one person
may be an employee of each of the persons, especially where such persons are
part of the same service arrangement.
18. Making Service Available to 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.
19. 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 employer exercises control through the threat of dismissal,
which causes the worker to obey the employer's instructions. An independent
contractor, on the other hand, cannot be fired so long as the independent
contractor produces a result that meets the contract specifications
20. 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
Read more posts about business law by Jim
Thomas at his blog, No
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