Independent Contractor vs. Employee… A Test for Business
It is extremely important that business owners correctly determine whether the individuals providing services are employees or independent contractors. The IRS has a checklist of 20 factors, which are based on the common law as developed in past court cases and administrative hearings. Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor.
Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” 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.
The business must exercise sound judgment in its classification of workers and thereby in distinguishing whether a worker is an employee versus an independent contractor. The business can implement methods such as the ones below, to help mitigate a potential misclassification:
1. Ensure that the business has a written agreement (an independent contractor agreement) with its independent contractors and that the independent contractor agreement describes the scope of the work to be performed, the compensation paid, the timing of the work and clearly define the independent contractor’s tax obligations
2. Ensure that the independent contractor has liability insurance, particularly if that contractor is a professional.
3. Ensure that the independent contractor who is a professional has his or her pertinent license and that such license is current
4. Ensure that the independent contractor has a current business license from the city/county in which he or she is operating
5. Do not set independent contractor’s work hours
6. Do not provide the independent contractor with tools, equipment, software or supplies with which to perform his or her work
7. Do not provide the independent contractor any benefits, which the business provides to its employees.
8. Do not retain or terminate or attempt to retain or terminate assistants or employees for or of the independent contractor
9. Ensure that the independent contractor submits invoices for his or her work.
With these safeguards in place, the business can ensure that federal and state laws are followed and avoid liability and risk through the implementation of proper workplace guidelines and practices.
If you missed part one of this article, we went over the IRS classifications for employees versus independent contractors.
About the author:
Renie Leakakos, Esq., is the Managing Attorney for Leakakos Law, APC. She studied law at Loyola Law School. Renie has “traditional” attorney work experience in a law firm setting as an associate and managing partner. She also has extensive hands on experience working in the corporate arena in sales and marketing. Her expertise is in corporate formation and compliance, contract negotiation, investment due diligence, business transactions and real property law.
You can learn more about Renie Leakakos in a previous Flight Club podcast episode.