The Rapid Demise of Independent Contractors

Companies have traditionally used independent contractors for flexibility and cost-saving purposes to provide services and functions.  By utilizing contractors rather than hiring employees, whether full-time or part-time, employers are able to better control both payroll costs and taxes.

The financial difficulties of both states and the federal governments have placed themselves in over the past several years have led to a pronounced movement by these governments to reduce “tax fraud” and employee misclassification by re-classifying many of these independent contractors as employees.

There are significant cost ramifications if a person who provides services to your company, who traditionally has been categorized as an independent contractor, is required now to be classified as an employee.  For example, an employer, in contrast to a contractor, must now withhold taxes from their paycheck (employees are W-2 rather than 1099 individuals), social security taxes must be paid, and state unemployment and workers’ compensation coverage must be provided.

Typically, this issue is presented when independent contractors seek employment-like benefits from employers, such as overtime compensation under the Fair Labor Standards Act, unemployment compensation, workers’ compensation or Social Security benefits.

The five (5) principal standards for determining whether an individual is an independent contractor or an employee are as follows:

1. Control of the individual in performing his job duties;
2. Opportunity for profit or loss either with providing services to your company or others;
3. The degree of skill and independent initiative required to perform the work;
4. The permanence or duration of the relationships; and
5. The extent to which the work is an integral part of the employer’s business.

Recent trends, particularly among states, are to focus on the “control” issue.  When State Departments of Labor have found there to be sufficient “control” over a person providing services, they will find an employment relationship rather than that of an independent contractor.  Since some control is always exerted over the manner in which the job is done (for example, instructing the individual, that while performing the services, to be dressed professionally and to act in a professional manner), some states are interpreting these types of “controls” to be tantamount to employment.  The States’ Departments of Labor will then consider these and similarly situated individuals to be employees and assess substantial back taxes and penalties for “misclassification.”  It is strongly recommended that companies review their independent contractor relationships to determine whether these individual are in fact independent contractors and, if questionable, to either affirmatively make them employees or to strengthen the independent contractor relationship.

Questions?

If you have any questions regarding your company’s use of independent contractors, please contact Gary Kessler via e-mail or call 404-909-8100.