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Are You an Employee or Independent Contractor?

Posted by Eric Kingsley | May 05, 2014 | 0 Comments

Construction independent contractor

Misclassification of employees as independent contractors

Our recent post about national port truck drivers (click here to read) highlights the significant number of employees misclassified as “independent contractors” and the impact it has on FMLA rights, employee compensation, tax collections, and unemployment insurance. We now further explore the topic of “misclassification” and the actions the Department of Labor (DOL) and Internal Revenue Service (IRS) have taken to catch violators.

According to the DOL website, “Misclassified employees are often denied access to critical benefits and protections – such as family and medical leave, overtime, minimum wage and unemployment insurance – to which they are entitled. Employee misclassification also generates substantial losses to the Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers compensation funds.”

The Department's Misclassification Initiative, launched under Vice President Biden's Middle Class Task Force, is trying combat this pervasive issue and restore rights to those denied them. In 2011, a Memorandum of Understanding (MOU) between the Department and the Internal Revenue Service (IRS) was signed by both parties. Under this agreement, the agencies agreed to work together and share information to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal labor laws.

DOL conducting “directed” investigations and working closely with IRS

The DOL is now visiting places where there hasn't been a complaint as well as singling out certain industries in its search for companies violating rules governing misclassification of independent contractors. For example, cable installers, electrical contractors and other construction laborers are the target of these investigations. Results of these investigations show most companies were found to be in violation. Due to the agreements and improved communication between the DOL and IRS, the DOL is now checking such statistics as the ratio of W-2s to 1099s. When the 1099 form is issued to an individual social security number instead of an entity, there will be intense scrutiny.

The IRS 20-Factor Test

Another tool is the the IRS's 20-factor test, used to determine whether sufficient “control” is present to establish an employer-employee relationship or an independent contractor-client relationship. According to the IRS, these factors should be considered guidelines. Not every factor is applicable in every situation, and the degree of importance or “weight” of each factor varies depending on the type of work and individual circumstances. However, all relevant factors are considered by the IRS in probing the relationship; no one factor is decisive.

In arriving at a decision with respect to the status of a taxpayer, the IRS looks at 20 factors, which are listed below. No single factor is used to determine the status of a taxpayer or their relationship to another taxpayer. However, the facts and circumstances surrounding the relationship between two taxpayers are either supported or not supported. These factors are either present or absent, as follows:

(1) Instruction

(2) Training

(3) Integration of duties

(4) Services rendered personally

(5) Hiring, supervision & paying assistants

(6) Continuing relationship

(7) Established hours of work

(8) Full-time requirement

(9) Working on “employer” premises

(10) Order or sequential nature of tasks

(11) Oral or written reports

(12) Payment by hour/week/month/etc.

(13) Payment of business travel

(14) “Employer” furnished tools or materials

(15) Significant investment

(16) Realization of profit/(loss)

(17) Multiple employers

(18) Service availability to general public

(19) Right to discharge

(20) Right to terminate

The presence of (1) instruction, (2) training, or (3) the integration of duties with those of employees, or (10) the inherent sequential nature of tasks suggests employee status. The presence of (4) personal servitude (e.g., running errands for supervisor, making coffee) or responsibilities involving the (5) hiring, training or supervision of others also suggests employee status.

Want to know how the other factors help determine employee status?

Have more specific questions about your employment status? 

If so, don't hesitate to contact the experienced California employment lawyers at Kingsley & Kingsley. Feel free to call us toll-free at (888) 500-8469 or click here to contact us via email. We are located in Encino, CA (Los Angeles).

About the Author

Eric Kingsley

In practice since 1996, attorney and firm co-founder Eric B. Kingsley has litigated complex cases and authored numerous appellate briefs in both state and federal court on behalf of the California law firm of Kingsley & Kingsley, including over 150 class actions. Mr. Kingsley concentrates his pra...

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