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Employee v. Independent Contractor

I just got this from a law firm in their 'newsletter'

"Another classification issue that received a great deal of attention in 2015, and which will continue to be a thorn in the side of employers, is the distinction between employee and independent contractors. In 2015, the Department of Labor (DOL) issued guidance on the determination of whether a worker is an employee or an independent contractor. Specifically the report analyzed the FLSA’s definition of “employ” and the application of the “economic realities” test, used by federal district courts. The DOL’s guidance is important as the misclassification of independent contractors has significant financial implications.

The FLSA defines “employ” as “to suffer or permit to work.” The economic realities test focuses on six factors to determine if the worker at issue is economically dependent on the employer or is actually in business for him or herself.

The six factors which make up the economic realities test are:
1. Whether the work performed is an integral part of the employer's business;
2. Whether the worker's opportunity for profit or loss is affected by this managerial skills;
3. The extent of the worker's investments relative to those of the employer;
4. Whether the work performed requires special skills and initiative;
5. The level of permanence in the relationship; and
6. The degree of control the employer exercises or retains over the workers.

The DOL has emphasized that all six factors must be considered and that no single factor is dispositive of a worker’s employee status. Interestingly, the sixth factor, the “degree of control” is the common law test; nevertheless, the DOL has advised that it should not be given “undue weight.”

Employers must be aware of all six factors and cognizant that despite a written agreement and regardless of label given to the individual, the working relationship must satisfy the economic realities test. Best-practices mandate that the employer reevaluate their independent contractor relationships for continuing compliance. Finally, employers must know that employee status under the FLSA is broadly construed in favor of the worker being considered an employee. "

 

What are your General Counsels telling you about the factors? They are somewhat overly broad in my opinion. How does this affect those who do outsourced CFO or Controller work?

Answers

Gary Honig
Title: President
Company: Creative Capital Associates Factoring Co..
LinkedIn Profile
(President, Creative Capital Associates Factoring Company) |

Wayne,

The issue of independent contractors classification is big news right now due the Uber lawsuit going on in California. It has major ramifications for the entire new sharing economy. So there is a lot at stake.

With regards to 1099'rs though, a lot has been written and you can find a list of 20 items to consider at IRS.gov The bottom line - payroll tax must be paid. Either through the company having the work done or the Contractor contracted to do the work. A contractor contracted to do the work means just that.

If you are talking with a company about outsourced CFO or controller work - you would investigate the scope of work and contract a price and terms to do the job. You wouldn't expect to get a check on Friday for the hours you worked.

I tell my clients this rule of thumb - if the individual person is earning the majority of their total income from you paying them, they are an employee. But I also tell them they can somewhat insulate themselves from liability by getting individuals to show proof of estimated tax payments and have it on file just in case.

Because liability is what this is, a small business owner who is found to have not paid payroll deductions will be liable personally for the tax, penalties and interest on the unpaid tax. This is one of those follow you to your grave liabilities, you can't file bankruptcy to get away from it. So the decision to classify a worker is a vitally important decision.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Gary,

I'm a C-Corp with payroll, so it's not so much about me, but others. Thanks for some clarity.

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