Column: Independent contractors aren't employees

In 2005, the Office of the Legislative Auditor for the state of Minnesota, found approximately 14 percent or one in seven businesses misclassified at least one worker as either an employee or an independent contractor.

In 1984, according to the US Government Accountability Office, the IRS estimated a loss of $1.6 billion due to misclassified workers.

Minnesota, along with several other states, has agreed to collaborate with the U.S. Department of Labor to crackdown on employers who are out of compliance. According to the Associated Press, in 2010, these enforcement efforts discovered approximately $4 million in back wages for employees who were misclassified.

Improperly classifying employees as independent contractors affects the employee’s overtime pay and minimum wage status. The misclassification also allows employers to avoid paying state and federal taxes including Social Security, unemployment insurance and worker’s compensation. As a result of the enforcement actions, employers are being ordered to pay back taxes, penalties and interest.

There are situations where a worker may wish to be classified as an independent contractor due to the freedom and flexibility contractors enjoy in contrast to restrictions required of actual employees. Employers may also like to hire an independent contractor to complete a “project.”

Keep in mind that just because an employer has a contract with a worker that may not be enough to classify them as a contractor.

According to the IRS, there are three categories to consider when determining if a worker is a contractor or an employee. The first category is behavioral control, which shows whether the employer has the right to direct when, where and how the worker completes the job. An employer should consider if the worker receives instruction how to complete the work including what tools to use, oversight by a supervisor and training.

The second category is financial control where the independent contractor can realize a profit or loss from their work because they have a personal financial stake in their own company. An employee, on the other hand, can be rewarded or disciplined depending on job performance. Financial control is also measured by whether the employer provides payment to the worker by the hour. In contracts, an independent contractor should be paid by the job or through commission.

The final category to consider is the type of relationship the worker has with the business. If the worker provides services to more than one employer at the same time, this could be considered an independent contractor. If the worker could be terminated or fired, this may constitute an employment relationship whereas an independent contractor cannot be fired if the terms of the contract are being met.

In order to determine whether contractors are indeed employees, employers could request assistance from the IRS. Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, is used to resolve federal employment and income tax matters. While drawing the attention of the IRS usually causes stress and anxiety, this is an avenue an employer could take.

The IRS also has a 20-point test employers can use to evaluate independent contractor status. The test is also known as the right-to-control test.

It is important to note that a worker does not have to meet all 20 criteria in the test to be classified as an employee. The 20 factors used to evaluate independent contractor status vs. employee status are listed on the IRS website. The website gives great detail about each factor and the aspects to consider.

A different route for employers is performing an internal audit.

Once the audit is complete, the company may wish to review hiring practices to ensure workers are hired correctly.

Goodhue County currently has 335 employees. The county does hire independent contractors and recently went through an internal audit process of evaluating each contractor, the signed contract and work they perform. It was an educational and valuable process.

This article is not intended to give legal advice but to bring forth an area of employment law employers may not have considered when hiring and compensating workers. If you have questions about this information, there are many areas to research on the Internet or consult with a labor attorney.

Tags: opinion, columns