There is no absolute test for determining who is an employee and who is an independent contractor, resulting in confusion among employers and the misclassification of employees.
A number of government agencies have received funding increases specifically to address the issue and the IRS is randomly auditing classifications at 6,000 companies over the next three years. That makes this a good time for employers to review worker classifications and make sure they have it right, says Miriam Rosen, an employment law attorney at McDonald Hopkins LLC.
“Every company needs to take a hard look at who is classified as an employee and who is classified as an independent contractor,” says Rosen.
Smart Business spoke with Rosen about the difficulty of correctly classifying employees and the steps you can take to avoid serious consequences.
Why has this issue become a high priority?
The government has identified this as an issue that is stripping employees of rights by misclassifying them as independent contractors, causing workers to lose out on potential overtime, access to unemployment compensation, health benefits, pensions and other benefits that employees receive. In addition, state and federal governments are strapped for money and they view this as a potential source of revenue. If government agencies can identify workers who are misclassified as independent contractors, this increases the pool of people who are paying taxes and having taxes paid on them, which increases revenue. The U.S. Government Accountability Office has actually estimated that lost revenue from independent contractor misclassification is well in the billions of dollars.
What are the criteria for determining whether a worker is an employee or an independent contractor?
There is no bright line test, and different government agencies use different tests to classify workers. But the basic criterion for classifying a worker as an employee is that the employer controls what that person does and how he or she does it. Examples of control are setting hours, defining how the employee does the work, providing tools to do the job, and providing equipment and space to perform the work.
Independent contractors, on the other hand, control the work themselves, deciding how and where the work is done with their own equipment and tools. The only thing the business gets from them is the end product.
Other factors are whether the workers have some risk of profit or loss, and whether they hold themselves out to other businesses as someone who offers these services.
