Use the IRS Tests to determine Independent Contractors versus Employee
Although the FLSA overtime changes are held up for the moment, there are other classification scenarios that employers must ask themselves. For example “Is this worker an employee or an independent contractor?” because it is their responsibility to properly classify your workers. The correct classification should start from the beginning of the work relationship otherwise the misclassification can cost you a lot in penalties and fines including agencies such as the IRS and the Department of Labor.
What is the Difference Between Independent Contractor and Employee?
The IRS defines an employee as: Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. The Department of Labor defines “employ” as: including to “suffer or permit to work”, representing the broadest definition of employment under the law because it covers work that the employer directs or allows to take place.
It appears to benefit employers to classify individuals as Independent Contractors because of the reduced liabilities associated with a W-2 employee.
Who is an Independent Contractor?
A worker who is identified as an independent contractor practices independent employment and can contract with you and/or your business to do work according to their own methods. The independent contractor usually ends their employment relationship with your business once the piece of work or assignment is completed.
How to classify your employees and independent contractors:
These are the tests the DOL and IRS use to determine if your workers are independent contractors. We recommend using the same qualifications.
FLSA 6 Prong Test:
- Extent of work performed by the independent contractor.
- Workers managerial skills affect his/her opportunity for profit or loss of the company.
- Does the worker invest in facilities/equipment?
- What is the worker’s skill and initiative?
- Permanency of the relationship. (ie. Do you work with them every day?)
- Nature and degree of control by the employer.
IRS 3 Prong Test (Darden Factors):
- Behavioral control of the organization over that independent contractor.
- Financial control over them (providing tools, uniforms, vehicle).
- Relationship of the parties.
Check your State / Local Independent Contractor requirements too:
As of 2016, thirty-five states have laws against misclassification of employees. To mention a few: California, Nevada, Iowa, New York, Oregon, and many more.
