The growing number of contingent workers by many organizations has focused attention on another group of legal regulations – those identifying the criteria that independent contractors must meet.[1] The process serving industry is currently facing such challenges from outside industry professionals. For an employer, classifying someone as an independent contractor rather than an employee offers a major advantage. The employer does not have to pay Social Security, unemployment, or worker’s compensation costs. These additional payroll levies may add 10%-20% or more to the costs of hiring the individual as an employee. Most federal and state entities rely on the criteria for independent contractor status identified by the Internal Revenue Service (IRS).
[1] Andrew E. Schultz, “Are Your Independent Contractors Really Employees in Disguise?” Work Span, April 1, 2006, 57-60.
[1] Andrew E. Schultz, “Are Your Independent Contractors Really Employees in Disguise?” Work Span, April 1, 2006, 57-60.
However, the misclassification of employees as independent contractors is becoming an increasingly significant legal concern for organizations.[1] Firms, such as Wal-Mart, Allstate, Microsoft, and FedEx have settled lawsuits for misclassifying individuals as independent contractors[2], although recently, a court determined that FedEx had properly classified a large group of its drivers. [3]
There are some key differences between an employee and an independent contractor that the IRS has identified. These differences are as follows:
Behavioral Control – This factor indicates the extent to which and employer can control what a worker does and how a worker performs. One key area is “business instructions given to the worker,” such as where and when to work, in what sequences, and with what tools and equipment, as well as the purchase of certain supplies and services. The other area is “business training given to the worker,” such as when someone must be trained to perform in a specific manner, rather than accomplishing results. Particularly, current issues within the process serving industry is the development of “Standards” that companies such as debt collection firms, are requiring of their “Independent Contractors.” If the company is requiring specific times, places, number of attempts, special data, special equipment, specific pricing, etc., it becomes more likely that the independent contractor is being misclassified. Hence, the individual is essentially an employee, subject to the requirements listed by the company.
When a company provides training to an individual, for the performance of the duties, or in order to provide services to the company, the individual is not an independent contractor. If the company is controlling the individual’s training, via company training sessions, company meetings/seminars, etc., the individual is likely to be classified by the IRS as an employee.
Financial Control – This factor focuses on the extent to which an employee can control the business facets of a worker’s job. Considerations include how many un-reimbursed business expenses a worker has, and what investments a worker makes independently to do the job. Other financial factors include whether a worker “provides services to other firms, how the business pays the worker, and if the worker can make a profit or loss.” Companies indicating that they will pay contractors weekly, monthly, or pay after stipulated number of jobs are completed, within a given time frame, etc. are factors to consider. When a company stipulates how it will pay the contractor, it is likely that the contractor is misclassified, and it therefore, an employee under IRS guidelines.
Relationship-Type Factors – A number of other items can help clarify whether a relationship is truly independent or not, such as having a written contract, and stipulating the extent of services provided. Also, if the employer provides benefits, such as insurance or pensions, it is more likely that the person is an employee, and not an independent contractor. Companies and contractors can enter into a contractual relationship, but the contractor should maintain control over themselves and their operations. The company can require specific services, but cannot mandate who, what, when, where, and how those services are performed, so long as such services are performed adequately. In addition, Independent Contractors must maintain their ability to contract with other companies. Non-compete agreements generally mean that the individual is likely to be classified as an employee using IRS guidelines.
However, most contractors are very willing to stipulate to certain provisions, provided that the contractor maintains control over their person and business functions (i.e. their fees) and can accept or refuse to provide services. For example, most independent contractors are willing to attend certification or educational programs, to achieve additional business opportunities from other companies. In certain areas, process servers are required by statute to be certified or licensed. In other areas, certification or educational training is not statutory; however, companies believe that those who have credentials are more capable of providing effective services versus those who have not received any type of education or training through a certification program.
For more information and samples of factors, please visit the IRS website at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-%28Self-Employed%29-or-Employee%3F.
M. Dwojewski
MAAPPS Legislative Committee
[1] Thomas R Bundy, “Worker Misclassification: The Next Big Legal Concern?” Employee Relations Law Journal, 33 (2007), 18-26.
[2] Dean Faust, “The Ground War at FedEx,” Business Week, November 28, 2005, 42-43.
[3] Alex Roth, “Verdict Backs FedEx in Labor Case,” The Wall Street Journal, April 2, 2009, B4.
There are some key differences between an employee and an independent contractor that the IRS has identified. These differences are as follows:
Behavioral Control – This factor indicates the extent to which and employer can control what a worker does and how a worker performs. One key area is “business instructions given to the worker,” such as where and when to work, in what sequences, and with what tools and equipment, as well as the purchase of certain supplies and services. The other area is “business training given to the worker,” such as when someone must be trained to perform in a specific manner, rather than accomplishing results. Particularly, current issues within the process serving industry is the development of “Standards” that companies such as debt collection firms, are requiring of their “Independent Contractors.” If the company is requiring specific times, places, number of attempts, special data, special equipment, specific pricing, etc., it becomes more likely that the independent contractor is being misclassified. Hence, the individual is essentially an employee, subject to the requirements listed by the company.
When a company provides training to an individual, for the performance of the duties, or in order to provide services to the company, the individual is not an independent contractor. If the company is controlling the individual’s training, via company training sessions, company meetings/seminars, etc., the individual is likely to be classified by the IRS as an employee.
Financial Control – This factor focuses on the extent to which an employee can control the business facets of a worker’s job. Considerations include how many un-reimbursed business expenses a worker has, and what investments a worker makes independently to do the job. Other financial factors include whether a worker “provides services to other firms, how the business pays the worker, and if the worker can make a profit or loss.” Companies indicating that they will pay contractors weekly, monthly, or pay after stipulated number of jobs are completed, within a given time frame, etc. are factors to consider. When a company stipulates how it will pay the contractor, it is likely that the contractor is misclassified, and it therefore, an employee under IRS guidelines.
Relationship-Type Factors – A number of other items can help clarify whether a relationship is truly independent or not, such as having a written contract, and stipulating the extent of services provided. Also, if the employer provides benefits, such as insurance or pensions, it is more likely that the person is an employee, and not an independent contractor. Companies and contractors can enter into a contractual relationship, but the contractor should maintain control over themselves and their operations. The company can require specific services, but cannot mandate who, what, when, where, and how those services are performed, so long as such services are performed adequately. In addition, Independent Contractors must maintain their ability to contract with other companies. Non-compete agreements generally mean that the individual is likely to be classified as an employee using IRS guidelines.
However, most contractors are very willing to stipulate to certain provisions, provided that the contractor maintains control over their person and business functions (i.e. their fees) and can accept or refuse to provide services. For example, most independent contractors are willing to attend certification or educational programs, to achieve additional business opportunities from other companies. In certain areas, process servers are required by statute to be certified or licensed. In other areas, certification or educational training is not statutory; however, companies believe that those who have credentials are more capable of providing effective services versus those who have not received any type of education or training through a certification program.
For more information and samples of factors, please visit the IRS website at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-%28Self-Employed%29-or-Employee%3F.
M. Dwojewski
MAAPPS Legislative Committee
[1] Thomas R Bundy, “Worker Misclassification: The Next Big Legal Concern?” Employee Relations Law Journal, 33 (2007), 18-26.
[2] Dean Faust, “The Ground War at FedEx,” Business Week, November 28, 2005, 42-43.
[3] Alex Roth, “Verdict Backs FedEx in Labor Case,” The Wall Street Journal, April 2, 2009, B4.
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