DOL and IRS Ask: "How Independent Are Your Contractors?"
Organizations that use independent contractors should be prepared to explain and defend why these workers should not be classified as employees. The Department of Labor (DOL) has requested $25 million to pursue employers who misclassify employees as independent contractors as part of a new "Misclassification Initiative" that targets the construction industry, manufacturing operations, restaurants and home healthcare. In addition, the Internal Revenue Service (IRS) will be auditing 6,000 randomly selected companies over the next three years with an eye to worker-misclassification issues.
A Patchwork of Laws
Whether to classify a worker as an employee or IC is defined by a patchwork of federal and state laws and "tests," depending on the context. These tests include —
- Control and Independence: Used for purposes of federal income taxes;
- Economic Realities: Used in cases involving federal wage-and-hour and other laws;
- ABC: Used by many states in unemployment-compensation cases;
- Right of Control: Used by many states for workers'- and unemployment-compensation cases and for federal laws involving immigration, labor relations and retirement benefits; and
- Relative Nature of the Work: Used by some states in workers'-compensation cases.
- Although these tests differ in significant ways, they also overlap and have common threads. The finer distinctions are matters for legal counsel to resolve.
Characteristics of ICs
As a general rule, ICs are self-employed individuals or small-business owners who provide services for an organization but do not have an employment relationship with it. ICs generally have freedom over their working conditions and are responsible for providing whatever is needed for their services — e.g., equipment, insurance, training and extra labor. The tests that define ICs focus broadly on these three factors:
- Independence and Autonomy: The more independence and autonomy a worker has from the organization, the more likely the worker is an IC.
- Nature of Services: The more a worker's services are discontinuous, temporary and not tied to the organization's normal operations, the more likely the worker is an IC.
- Established Business: The more evidence that a worker has an established business outside of the organization, the more likely the worker is an IC.
Depending on the test, strength in one area may outweigh weakness in another. How an organization treats workers and its relationship with them have a strong impact on whether they are considered ICs or employees, especially with regard to the first factor.