labor lawAdivision of labor law center

The IRS  and U.S. Department of Labor are cracking down on employers who try to avoid employment taxes by misclassifying employees as independent contractors.

 

Under IRS regulations, an independent contractor is a self-employed small business person. The employer does not have to pay FICA or unemployment taxes on independent contractors, under federal law. State laws requiring workers’ comp insurance do not apply to independent contractors. Employers are also not required to withhold federal income taxes for independent contractors.

 

The minimum wage and overtime provisions of the FLSA, the federal Fair Labor Standards Act, do not apply to independent contractors.

 

All of these factors make hiring independent contractors very attractive to employers. However, both the IRS and the U.S. Department of Labor have stepped up enforcement actions against employers who misrepresent workers as independent contractors, when in fact they are employees.

 

To further complicate the issue, there is no one standard or group of standards to determine if a worker is an independent contractor, rather than an employee. The IRS has traditionally used the 20-factor test, particularly to determine if workers’ compensation coverage is required.

 

The IRS 20-factor test basically determines how much control the employer exercises over the worker. In general, a high level of control results in employee status, rather than independent contractor status. When an employer controls when, where or how the work is performed, that usually constitutes employee status.

 

Other agencies use the economic realities test to determine if the worker is an employee for FMLA and WARN purposes, as well as under the FLSA. This test is also used to determine if a worker is an employee under Title VII of the Civil Rights Act, the Age Discrimination in Employment Act or ADEA and ADA, the Americans with Disabilities Act, as well as other discrimination laws.

 

The economic realities test is more stringent than the 20-factor test. It measures the degree to which the worker is dependent upon one employer for his or her livelihood. For example, a computer programmer may be employed as an independent contractor. However, if the employee’s entire financial well-being is dependent upon one business, the worker is an employee.

 

Federal courts often use a hybrid of the two tests for lawsuits on various topics.

 

In addition, a number of states have their own tests for employee status. In California, for example, an employer cannot hire independent contractors to perform its regular business. So a printing company could hire a computer programmer as an independent contractor – but not a printer.  A software company could hire a printer as an independent contractor — but not a computer programmer.

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