Employee vs. Independent Contractor: A Game of 20 Questions
In today's economic climate, downsizing is an unfortunate reality for many businesses. Despite staff reductions, a company must continue to produce if it is to survive long term. While contingent staffing may seem like a logical way to get the work done—and keep headcount and associated employment costs such as taxes and benefits down—think twice before engaging the services of an “independent contractor” (IC).
Simply because (a) you refer to a worker as an IC, (b) he or she has agreed to the arrangement in a written contract, and (c) payments are issued by accounts payable rather than the payroll department does not mean that the individual is, in fact, an IC. The nature of the relationship between the individual and the company is the true determinant, and misclassification can result in serious consequences for an organization. These consequences include back-paying taxes; retroactively providing benefits, including vacation pay, stock options and 401(K) contributions; and stiff financial penalties.
There are a number of events that may trigger an investigation into your worker classification practices. For example, a contingent worker may apply for unemployment benefits at the conclusion of his or her contract, make a complaint of discrimination or harassment, or file a workers' compensation claim. In addition, the IRS may target the organization for an audit either randomly or in response to a sudden and significant change in the number of reported W-2 employees.
The specific criteria used to discern whether an individual is an employee or an IC depends upon which government agency is researching the situation. Beware: It is not uncommon for one office to get others involved, and their conclusions are not always consistent.
The focus of any such inquiry is the level of control that the employer holds over the individual. It is important to note that whether this control is actually exerted is irrelevant; what really matters is whether the employer could, if it so desired, dictate the details of the individual's work.
The Internal Revenue Service's 20-Factor Control Test is the most explicit in its requirements. The good news is that no single factor is decisive. Rather, the facts and circumstances surrounding all of them must be carefully considered when assessing the degree of control that exists in a given work arrangement.
When determining whether an individual is more appropriately classified as an employee or IC, ask the following questions:
|1. Is the individual's work vital to the company's core business?||Employee activities are integrated with the organization's business operations.||IC services typically are limited to non-essential business activities.||2. Did the company train the individual to perform tasks in a specific way?||Employees usually are taught the specific work procedures that they are expected to follow and must comply with any other employer requirements with regard to these activities.||ICs generally are considered "experts" in their field and, as such, can determine which work methods are most appropriate. Additionally, they typically are held accountable only for outcomes, not the means with which they are achieved.|
|3. Do you (or can you) instruct the individual as to when, where, and how the work is performed?|
|4. Do you (or can you) control the sequence or order of the work performed?|
|5. Do you (or can you) set the hours of work for the individual?||Employees generally work on a schedule determined by their employer.||ICs can work whatever hours they choose, provided that agreed-upon deadlines are met.|
|6. Do you (or can you) require the individual to perform the work personally?||Employees must do the tasks for which they were hired themselves.||ICs are free to delegate to their own staff or subcontract the work to others.|
|7. Do you (or can you) prohibit the individual from hiring, supervising, and paying assistants?|
|8. Does the individual perform regular and continuous services for you?||Employees typically have an open-ended relationship with a company, even if the work is performed at irregular intervals.||ICs work on a project-by-project basis, each time with a new contract.|
|9. Does the individual provide services on a substantially full-time basis to your company?||Employees usually are expected to devote all working hours to their employer.||ICs do not spend so much time with any one company that they are restricted from doing projects for others and, in fact, generally work for multiple clients concurrently.|
|10. Is the company the sole or major source of income for the individual?|
|11. Is the work performed on your premises?||Employees ordinarily are required to work on-site.||ICs are free to work off-site, such as in a home office.|
|12. Do you (or can you) require the individual to submit regular reports, either written or oral?||Employees may be asked to provide status or activity reports on a regular basis.||ICs are responsible for producing a final deliverable and are not, therefore, required to provide interim reports.|
|13. Does the company pay the individual by the hour, week, or month?||Employees usually are paid at fixed intervals.||ICs generally are paid for their results, not the amount of time worked.|
|14. Does the company pay the individual's travel and business expenses?||Employees who incur work-related expenses typically are reimbursed by their employer.||ICs usually are expected to incorporate out-of-pocket expenses into their project fee rather than be directly reimbursed for them.|
|15. Are tools or equipment furnished for the individual?||Employees generally use company-provided supplies.||ICs are expected to own and use their own supplies.|
|16. Does the individual have a significant investment in facilities, tools or equipment?||Employees typically use their company's facilities, tools and equipment.||ICs incur expenses related to work space, equipment, etc., like any other business owner.|
|17. Can the individual realize a profit or loss from his or her services to the company?||Employees usually can expect steady paychecks||ICs run the risk of non-payment if a project is not completed according to the specifications detailed in the contract.|
|18. Does the individual make his or her services available to the general public?||Employees typically do not position and market themselves as service providers.||ICs publicize their services to a wide range of potential clients via direct mail, advertising, etc.|
|19. Can the individual terminate the relationship without liability?||Employees can quit at any time and can typically be released "at will" by their employers.||ICs legally are obligated to complete projects according to contract provisions and can be dismissed only if they fail to do so.|
|20. Does the company have the right to discharge the individual at any time?|
Do these 20 factors make it clear if the worker is an employee or not? Not always! There is currently federal legislation proposed to create IRS code to replace the 20-factor common law test with a supposedly simpler Internal Revenue Code. While this may or may not happen, the above factors are still practical questions for employers considering how to classify and use contingent staff.
Contingent Staffing Guidelines
In addition to the above factors and guidelines, a company can further differentiate between employees and contingent staff by other types of tangible and intangible treatment. Human resource professionals have long counseled managers on the care and treatment of employees. When it comes to contingent staff, care and treatment must be carefully handled. Contingent staff are not employees of the company and should not be entitled to or eligible for many company programs and events. It is critical for the company to recognize contingent workers as employees of a contingent-type agency or as independent contractors. As such, the company should not provide the following to a contingent worker:
- Company business cards.
- Company credit cards.
- Letters of recommendation.
- Name plates.
- Company stationary.
The following types of programs should be handled by the contingent worker's employer and not by the company:
- Recreational or social activities.
- Performance appraisals, salary adjustments, employee benefits.
- Disciplinary action.
- EEO/harassment policies, procedures and interpretation.
- Recognition programs.
Of the above items, the final two, training and travel, are more blurred in nature. Generally, generic training that is available to the public, and on-going developmental training should be the responsibility of the contingent workers and/or their employer. The company should provide any training that is specific in nature and required to successfully complete the job assignments. This often includes machine or specific software training or site-specific safety training. If a contingent worker will be required to travel during the course of their assignment, his or her employer should be responsible for all costs, reservations and reimbursements. The company should provide adequate notice and information to the appropriate employer.
In addition, the company should provide information on specific work-related policies and procedures contingent workers need to be aware of during their job assignment. These may include parking, building access, ID badges, smoking, phone systems, e-mail and other communication systems, solicitation, dress code, safety, company culture and conduct, and confidentiality and non-disclosure.
Employers must be aware of the ramifications involved with the use of contingent workers. There are ways to minimize the risks involved, specifically by knowing the legal and common-law landscape, using external vendors such as temporary and contract firms, and developing and enforcing company policy on the care and treatment of company employees and contingent workers. As we all continue to fight in the war for talent, having a staffing toolkit designed to provide the utmost in flexibility will go a long way toward ensuring the company's success and growth.
Article by Susan Burleigh, SPHR, of the SHRM Employment Committee, from http://www.shrm.org/