The Department of Labor issued an interpretation on July 15, 2015 addressing the misclassification of employees as independent contractors. Its impact is far reaching for business owners and even has implications for the commercial insurance arena. I’ve asked Dallas business attorney, Henrietta Munoz, to write a guest post outlining the DOL interpretation. I’ll follow this up next week with the potential impact of this ruling on commercial insurance.
You have just started your small business, or business is really taking off and you need help meeting your customers’ demands. Success depends in large part upon workers, consultants, vendors or other businesses you hire to help you. But what about cost? Maybe you can save money and effort by hiring an independent contractor?! Independent contractors won’t expect you to provide benefits such as insurance and vacation time. You won’t have to withhold federal taxes or pay Social Security or Medicare taxes. you just issue a 1099 and let them deal with the rest of it right?
Wrong! Don’t make the mistake of thinking you can just choose whether a worker is an independent contractor or an employee. You can’t. There are differences between the two, and if you try to treat the employee as a “1099 worker” you may find yourself dealing with an alphabet soup of governmental agencies. Think IRS, EEOC, TWC, DOL, OSHA, etc, etc. So, let’s look at how to determine whether a worker should be an employee, or whether they can be treated as an independent contractors.
To the Internal Revenue Service (IRS), if an employer controls the services the worker performs, then the worker is an employee, not an independent contractor. It considers three sets of facts to determine the degree of control by the employer or independent of the work:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? For example, employers are more likely to set work hours, provide equipment and supplies to carry out the work, issue uniforms, and establish rules of behavior for employees. Independent contractors, on the other hand, are more likely to set their own hours, provide their own equipment and determine their own behavior.
- Financial: Are the business aspects of the worker’s job controlled by the payer? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools / supplies, etc. In most cases, employees are paid whether or not the company profits from the work, whereas independent contractors bear the risk of losing money on an individual job.
- 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? Employees are more likely to provide services on an on-going basis, even though some employees may be temporary. Employees are more likely to provide services that are key activities of the company. For example, layers hired by a software developer and software engineers hired by a low firm are probably independent contractors, but lawyers hired by law firms and software engineers hired by software development companies are quite likely to be employees.
The IRS says, “There is no “magic” or set number of factors that “make” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also factors which are relevant in one situation may not be relevant in another.”
This being the case, it is best to consult with an attorney or HR professional when the facts point in both directions. For more information, check out Independent Contractor (Self-Employed) or Employee? IRS, 05-Aug-2015, found at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.
Henrietta S Munoz, JD
Henrietta Munoz, PLLC
2919 Commerce Street, #232
Dallas, TX 75226