Many businesses are turning to independent contractors in an effort to reduce labor costs and improve workforce flexibility. This can be a smart solution for the right roles and employment situations...but there is a caveat.
The misclassification of an employee as an independent contractor can have costly and extensive legal consequences. These may include the payment of back taxes, reimbursed overtime and benefits, back pay, penalties and interest. That’s to say nothing of the lost time and stress dealing with multiple federal and state government agencies.
It is absolutely critical that businesses correctly determine whether the workers that provide their services are employees or independent contractors.*
* These are not the only two worker classifications that exist in the private sector. There are also statutory employees and statutory nonemployees, which have their own rules for determination. For the purpose of this article, we are comparing the two most common classifications: employees (common-law) and independent contractors. For more information on employee classifications, see this page for IRS guidelines.
There is no one legal test that applies in every worker classification situation. For example, the Internal Revenue Service (IRS) and Department of Labor (DOL) use different, though similar, frameworks. State agencies have standards of their own, in dealing with matters such as workers’ compensation and unemployment insurance.
The general rule, however, is that a worker is an independent contractor if the paying business has the right to control or direct only the result of the work—not what will be done and how it will be done. In other words, the worker is “independent.”
A worker is an employee when the paying business has the right to direct and control the worker. This is true even if the business gives the worker freedom of action. What’s key is that the business has the right to direct and control the way the work is done, whether or not they actually do so.
In determining whether a worker is an employee or independent contractor, all information that provides evidence of the degree of control and independence is considered.
While the frameworks for determining worker status vary among federal and state agencies, the Common Law Rules provided by the IRS offer a good basis. Factors fall into three categories, or “rules.” These factors are considered relevant and applicable, but none are determinative on their own.
Factors considered include:
Factors considered include:
Factors considered include:
Just as there is no one legal test that applies in every worker classification situation, there is no “magic number” of factors that add up to a determination of either “employee” or “independent contractor.” No one factor stands alone. Businesses must consider all the factors in making a determination.
The general information contained in this article is not a substitute for legal advice. For assistance with legal issues related to employment law in Kansas, including employee classification, contact Fleeson Gooing today.