Employers that hire non-traditional workers must make sure to classify all members of their workforce properly. The misclassification of workers can result in serious problems for employers. Employee misclassification impacts federal/state tax withholdings, pay and benefits, and can give rise to potential unemployment compensation claims.
Whether an individual is properly classified as an employee or an independent contractor depends on the facts and circumstances. The controlling factor is if the employer has the legal right to control the detail of how services are performed. Classification is reviewed by both the IRS and the Department of Labor.
The IRS has advised that the following facts provide evidence of employee status:
- Behavioral Control. The extent the company controls or has the right to control what the worker does and how the worker performs the job;
- Financial Control. The extent that the business/finance aspects of the worker’s job are controlled by the employer; and
- Type of Relationship. The evidence of the relationship, including employee benefits and written contracts.
The Department of Labor, Fair Labor Standards Act Division relies on the U.S. Supreme Court’s review of independent contractor status. The Court has held that the determination of the employer/employee relationship cannot be based on isolated factors. Instead, all of the following factors are significant in the determination:
- The extent to which the worker’s services are an integral part of the employer’s business;
- The permanency of the relationship;
- The amount of the worker’s investment in facilities and equipment;
- The nature and degree of control;
- The worker’s opportunities for profit or loss; and
- The level of skill required in performing the job and the amount of the initiative and judgment of the worker.
