The Internal Revenue Service (IRS) and Department of Labor (DOL) are the 2 federal agencies that are charged with determining whether you are correctly classifying your workers as employees or independent contractors.
One primary goal of the IRS is to ensure appropriate collection of federal employment taxes by both individuals and businesses. The IRS applies what is known as common law rules when determining worker status. The purpose of these rules is to determine to what extent a worker is under the direction and control of the employer. The IRS has looks at 3 general areas when analyzing the worker/business relationship.
1. Behavioral: Does the organization control or have the right to control what the worker does and how the worker does his or her job?
Control exists if workers are told:
- When, where and how to work
- What tools, supplies or equipment to use
- What workers to hire/assist with the work
- Where to purchase supplies and services
- What work must be performed by a specified individual
- What order or sequence to follow in completely the work
Control may exist if workers are trained by the organization or in a particular manner.
2. Financial: Are the business aspects of the worker’s job controlled by the payer?
Facts that show the employer has a right to control the business aspects include:
- The extent to which the worker has unreimbursed expenses
- The extent of the worker’s investment
- The extent to which the worker makes services available to the relevant market
- How the business pays the worker
- The extent to which the worker can realize a profit or loss
3. Type of Relationship: Are there written contracts or employee type benefits?
Facts that show the type of relationship include:
- Written contracts describing the relationship
- Whether the worker is provided with employee type benefits
- The permanency of the relationship
- Whether the services are integral to the services of the organization
Unfortunately, there is no formula as to how many of these factors or which ones are the deciding factors in determining employee status. Organizations should think carefully about the entire relationship, consider the degree to which the right to control exists, and take into account the risks of incorrectly classifying employees as independent contractors. A review of already settled legal cases in this area maybe helpful in determining risk, although it should be noted that each outcome is based on unique facts and circumstances.
If you are really unclear as to whether a worker can safely be classified as an independent contractor, you can complete and submit a form SS-8 to the IRS for a determination.
The Department of Labor
The Department of Labor is the agency that enforces federal minimum wage and overtime requirements, as outlined in the Fair Labor Standards Act. The factors that the DOL reviews in determining worker status are:
- How permanent is the relationship?
- How much and what is the nature of the control by the employer?
- How integral are the services provided by the worker to the employers business?
- How much investment has the worker made in space and equipment?
- Is there potential for profit and loss by the worker?
- What is the amount of initiative and judgment with others in the open market required for the success of the worker/contractor?
- What extent does the worker/contractor engage in independent business organization and operation?
Again, there is no guarantee as to how the DOL will determine worker status based on the answers to these questions. Employers can turn to previously decided case rulings and opinion letters in an effort to analyze the risk to their organization.
It is important to remember that although often burdensome on our organizations, these laws and regulations were put into place to protect and provide for all workers so that they are fairly paid and benefitted and are covered in case of unforeseen hardships such as on-the-job injuries and unemployment. As non-profit professionals we must constantly balance the financial realities of our organizations with the importance of providing fair compensation and benefits for our valuable workforce.