The Age Old Question: Independent Contractor or Employee
A Closer Look at Worker Classification
Workers are an integral part of making any company successful and leveraging these relationships can make or break your business. We all struggle with the classification of a worker from time to time and everyone knows it can be confusing. While the IRS provides a 20-point checklist that can be used for determination of worker classification https://www.walthall.com/wp-content/uploads/2014/09/IRS-Indep-Contr-20-Point-Checklist.pdf, the Department of Labor and Workforce Development uses the ABC Test and Common Law test, which can make an already ambiguous situation more confusing.
Some companies consider short term workers independent contractors. The reality of this worker classification during an audit can be challenged and overturned without proper documentation. Will you be protected during a Tennessee Department of Labor and Workforce Development audit? Recently I spoke to an auditor of employer accounts for the Department of Labor and Workforce Development and the insight could save you from significant fines and penalties down the road.
One question companies get caught up on within the 20-points on the independent contractor checklist and ABC Test is “Does the worker provide services to more than one firm? If you state yes, this fact alone cannot win your case during an audit. Both employees and contractors can provide services to multiple companies. A better way to address this point is to ask yourself some additional questions: 1) Does the worker have a business card and/or advertise their services? 2) Do they have a company EIN separate from their social security number? 3) Does the worker provide you with an invoice for payment? 4) Is there a contract involved that could lead to legal liability if the relationship is severed prematurely? While answering yes to one of these questions alone would not create the independent contractor relationship, answering YES to most of these questions would help you strengthen your case.
Another key area that is heavily scrutinized during a Department of Labor and Workforce audit is who sets the work schedule? In this area, proper documentation is important. If the person provides you with a time sheet odds are they are an employee unless the industry norm is such. Here are some concepts that can help you clarify this issue: Do you set the work schedule? It is important to document how the schedule is determined. Does the worker have the right to perform similar services for others whenever he/she chooses? If you are determining the days/times the worker is at your organization, then they will likely be considered an employee. For example, paying someone to be present from even 8:00 to 12:00 twice a year can create accountability to your organization and all other factors being absent this worker will likely be considered an employee thereby subject to FICA, FUTA, and SUTA.
There are ways to strengthen your case with regard to worker classification. 1) Document how schedules are determined 2) Follow the 20-step test and ABC Test 3) keep substantiating documentation such as business cards and invoices on file. 4) Ask yourself, does the worker have a sustainable business that exists independently of your organization or does it rely on your company?
While each fact and circumstance is unique, organizations that rely on a simple W-9 form and limited substantiation will not alone be enough to win your Department of Labor and Workforce Audit. It is important to consider the totality of the relationship to avoid undue expenses that could be detrimental to your businesses success.