Workplace Relationships in the Millennium

Are Your Workers Really Independent Contractors Or Are They Employees?

Why does it matter?

Since the late 1980’s, the Internal Revenue Service has become increasingly active in reviewing the status of workers as either employees or independent contractors. The IRS considers this issue to be a significant area of revenue loss since, statistically, workers classified as independent contractors are more likely to avoid paying their taxes than workers classified as employees.

In the event of an unfavorable audit, with the addition of penalties and interest, worker reclassification can have disastrous effects upon the targeted business. In many cases, the businesses are unable to make the assessed payments and are forced to close.

Many reclassifications are based upon a lack of relevant supporting documentation rather than an actual reclassification. However, with proper preparation, there are many steps that business owners may take to defend their classification practices and to substantiate that their workers are, in fact, independent contractors.

Indications that your workers may be employees

  • You provide your workers with detailed instructions on how to do their jobs.
  • You train your workers how to do their jobs.
  • You do not allow your workers to hire their own assistants or helpers.
  • You require your workers to perform their services during set time periods.
  • You require your workers to be available on a full-time basis.
  • You require your workers to provide you with detailed reports of their activities.
  • You directly reimburse your workers for expenses they incur in doing their jobs.
  • You provide your workers with the equipment they need to do their jobs.
  • You prohibit your workers from working for your competitors or becoming competitors themselves.
  • You pay your workers by the hour.

What precautionary steps may you take to prepare for a worker reclassification audit by either the internal revenue service or any similar state agency?

  • Obtain written contracts from all of your workers documenting that they are independent contractors.
  • Have your workers obtain their own business cards which do not contain your company’s name and keep a copy of each worker’s business card in your files.
  • Have your workers obtain their own invoices that do not contain your company’s name and have them present you with their invoices before they are paid for any job.
  • Inquire as to whether your workers do any independent advertising and keep a copy of such advertisements in your file.
  • Determine whether the government provides any special exemptions for your type of workers which may allow you to treat them as independent contractors rather than as employees.