Independent Contractor or Employee?

The use of independent contractors versus hired employees is becoming more popular for employers, allowing them to cut down on costs. However, many employers fail to successfully differentiate employees and independent contractors. This misclassification can lead to financial consequences, including legal action. Below you can find two independent tests created by the IRS and Department of Labor to determine the degree of the relationship. In general, the classification relies on the degree of the workers’s economic dependence on the business.

IRS Common Law Rules – 

To determine whether a worker is an employee or an independent contractor, the IRS uses three categories to define the degree of control and independence within the business relationship. A positive answer to any one of these categories suggests the relationship is more controlled than independent, reflecting an employee/ employer relationship rather than an independent contractor.

1. Behavioral: Does the business owner control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the business owner? (These include how the worker is paid, whether the expenses are reimbursed, who provides the tools/ supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits such as pension plan, insurance or vacation pay? Will the relationship continue and is the work performed a key aspect of the business?

Department of Labor Administrator’s Interpretation –

The DOL released their own interpretation of the IRS statement, attempting to clarify the process of defining the economic dependence of the individual on the business. As with the IRS Common Law Rules, no single factor can determine the classification in question. They break down the IRS Common Law Rules into six factors:

1. The extent to which the work performed is an integral part of the employer’s business
2. The worker’s opportunity for profit or loss depending on his or her managerial skill
3. The extent of the relative investments of the employer and the worker
4. Whether the work performed requires special skills and initiative
5. The permanency of the relationship
6. The degree of control exercised or retained by the employer

If you have any questions regarding the classification of an employee, feel free to contact The Integrated Group at 425-822-8500 or info@theintegratedgroup.com