To gain clarity about the definition of an independent contractor, learn about some of the major factors derived from guidelines used by the Internal Revenue Service (IRS), Department of Labor (DOL), state employment development offices, and the courts that can help you determine whether someone is an independent contractor or an employee.
To implement the various employment laws, government agencies issue regulations and guidelines. Courts will then interpret and rule on the law, its definitions, regulations, and guidelines. To gain clarity about the definition of an independent contractor, you want to know the most important regulations and guidelines used by the IRS, Department of Labor, state-employment development offices, and relevant court rulings. While the IRS, DOL, and state agencies all have their classification checklists, each worker is viewed on a case-by-case basis, based on each agency's regulatory agenda, to ultimately determine whether the worker will be classified as an independent contractor or employee.
According to the IRS, in the big picture, the following three factors matter most. In some industries, they're weighted more heavily than in others. The first is behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job? Do you set their work hours, provide them a workstation, and control their work assignments? Do you tell them exactly how to drive routes? Or program code? Or deliver a sales presentation? For example, in many driver misclassification cases, the court points to the fact the employer provided them with their hours of work, route assignments, had them drive company-branded vehicles, and wear company uniforms, all of which makes them look like an employee.
Second, they look at the financials. Are the business aspects of the worker's job controlled by the payer? What financial commitment is made on the part of the independent contractor? This includes things like how the worker is paid, whether expenses are reimbursed, who provides the tools and supplies. The less investment the worker makes financially, the more likely they'll be viewed as an employee. For example, if you pay someone on an hourly basis, provide all their tools, and pay for all their expenses, they look like an employee.
This is especially true if they have no risk of profit or loss in their contract. Last, they look at the type of relationship. Are there written contracts or employee-type benefits? Such as a pension plan, insurance, vacation pay, et cetera. Will the relationship continue long-term and is the work performed a key aspect of the business? For instance, you may have brought on an interim sales manager on a contract to help during your critical transition, but it's now six months later and they're working full time and keeping the same schedule as your other managers.
They've become an integral part of your business. By now, they're looking more and more like an employee. Businesses must weigh each of these factors when determining whether a worker is an employee or an independent contractor. There's no magic or set number of factors that makes a worker an employee or an independent contractor, and no one factor stands alone in making this determination. Again, all of this is determined on a case-by-case basis.
Also, factors which are relevant in one situation may not be relevant in another. The key is to look at the entire relationship, consider the degree or extent of the right to control, and finally, document each of the factors used in coming up with the determination. Remember this, if they walk like a duck and they talk like a duck, then they're a duck.
DISCLAIMER: This course addresses US law concepts that may not apply in all countries. LinkedIn (including Lynda.com) and the instructor are not giving legal advice. Neither Linkedin (including Lynda.com) nor the instructor represent you. The information conveyed through this course is similar to a college or law school course; it is not intended to give legal advice, but instead to communicate information to help viewers understand the basics of the topic presented. The views and legal interpretations presented in this course do not necessarily represent the views of LinkedIn or Lynda.com.
- Legal requirements for classifying independent contractors
- Financial and strategic benefits of contract employees
- Downsides of misclassification
- What triggers complaints and investigations?
- Licensing statutes, permit requirements, and anti-discrimination statutes
- Preventing misclassification claims
- Considering an SS-8 ruling
- Amnesty programs