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Independent Contractor Classifications

Date: 7/1/10
Title: Independent Contractor Classifications

Earlier this year, the IRS announced that it would conduct random audits of 6,000 employers over the next two years to determine whether employees are being misclassified as independent contractors.  After being targeted by the IRS for classifying its ground-service delivery drivers as independent contractors, FedEx lost one round in its battle.  In June 2010, a U.S. district judge ruled that FedEx Ground and home delivery drivers in Illinois are not independent contractors under the Illinois Wage Act.  The court ruled that the drivers were employees because "their delivery work was an essential part of FedEx's business."  The court also noted that drivers must ear FedEx uniforms and drive trucks with FedEx logos, that FedEx structures drivers' routes so that the trucks are in use 9 to 11 hours a day, and that FedEx must approve replacement drivers.  Also, drivers were required to allow FedEx managers to do on customer service rides annually. 

Comcast Corporation was also sued by its cable installres, alleging that the were improperly classified as independent contractors and denied overtime pay and benefits.

In this day and age of downsizing and corporate layoffs, it is crucial that a company properly classify its independent contractors, especially if they were previous employees.

In order to do this properly requires an individualized analysis of the relationship between the company and the worker from a federal tax standpoint as well as applying state requirements.  According to the IRS, an individual qualifies as an independent contractor if the employer has the "right to control or direct only the result of the work of the individual and not the means and methods of accomplishing the result."  If the employer directs "what will be done and how it will be done", then it is likely that the employee is not an independent contractor.

According to the IRS, to assist in determining the degree of control and independence falls into three categories; however, there is no set number of factors that makes a worker an employee or an independent contractor.  No one factor stands alone in making this determination.

  1. Behavioral - Does the company control or have the right to control what the worker does and how the worker does his or her job?
    • What specific training and/or instruction is the worker given?
    • How does the worker receive work assignments?  Do they control their own schedule?  How much of their time is dedicated to this service?
    • Who determines the methods by which the assignments are performed?
    • Where does the worker perform services?
  2. Financial - Are the business aspects of the worker's job controller by the apyer, e.g. how the worker is paid, whether expenses are reimbursed, who provides tools, etc.
    • Does the worker lease equipment?
    • What expenses are incurred by the worker in the performance of the services?
    • Whom does the employer pay?
  3. Type of Relationship - Are there written contracts or agreements.  Will the relationship continue or is the work performed a key aspect of the business?
    • Are benefits available to the worker?
    • Can the relationship be terminated by either party without incurring liability?

Employer Implications and Protections

Employers can somewhat protect themselves under the IRS' safe harbor provision that shields an employer from liability for back taxes, interest, and penalties if they misclassify an independent contractor as an employee.  To qualify, the employer must demonstrate:

  • That all similarly situated workers were also classified as independent contractors.
  • That the employer consistently filed all required tax returns for all prior relevant periods.
  • That the employer had a reasonable basis for treating the employee as an independent contractor.

The safe harbor does not protect an employer from liability under state tax laws, wage and hour statutes or anti-discrimination laws.  If you want to be sure, you can file with the IRS a Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding -  http://www.irs.gov/pub/irs-pdf/fss8.pdf.  The IRS will review the information provided on the form and determine the worker's status; however, do not expect a quick response.

If you need assistance in evaluating your independent contractor classifications, please do not hesitate to contact us.

The foregoing has been prepared for the general information of clients and friends of Workplace Dynamics LLC.  It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel.