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Wednesday, November 13, 2019
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©2019 by the Self Storage Association (SSA). SSA and SSA Magazine are trademarks of the Self Storage Association, Inc. Opinions expressed by authors and other contributors do not necessarily reflect those of the SSA, publisher or editors, nor do they represent the policy or positions of the SSA. Information contained within articles should not be construed as the primary basis for legal or investment decisions.

10

Employee vs. Independent Contractor: Which Worker Classification is Proper

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Employee vs. Independent Contractor: Which Worker Classification is Proper

Businesses engage workers to perform a variety of tasks on their behalf. Some individuals are appropriately labeled as “employees” (who typically receive a W-2) and some “independent contractors” (who typically receive a 1099).

 

 

 

For example, the accountant retained to prepare a business’ tax return each year is most likely an independent contractor. Other individuals are not as easily classified.

 

The Department of Labor (DOL) and the Internal Revenue Service (IRS) have factors that should be applied and analyzed to ensure a proper designation is made.

 

For the DOL, one factor the courts consider is:

 

  • The extent to which the services rendered are an integral part of the business – The more integral the worker’s services are to the business, the more likely that individual will be deemed an employee. In contrast, a worker who renders services that are more disconnected from the day-to-day operations

 

For the IRS, one factor considered is:

 

Behavioral Control: A worker will be considered an employee if the business can direct and control the work performed by the individual. It is important to note that this applies even if the business elects not to exercise its right to control. The following should be considered:

 

  • Instructions: What type are given? Are they very specific, addressing when, where, and how to complete a job? The more specific the instructions, the more likely that individual is an employee.  In contrast, less instruction suggests less control, resulting in the individual being more likely to be properly classified as an independent contractor.
  • Evaluation systems: Does the business evaluate only the end result, or does it monitor and evaluate each step along the way? The more detailed the evaluation, the more likely the individual is an employee.
  • Training: Does the business provide expansive training to the individual about how specifically to do the job? If so, that likely means the worker is an employee. Independent contractors are generally responsible for their own training.

 

Improper classification may leave a business vulnerable to enforcement actions from the IRS with an accompanying tax burden. For example, the IRS may seek back employment taxes that were not properly remitted to the IRS because the worker was improperly classified as an independent contractor instead of as an employee. This could result in a substantial sum depending upon length of time and the number of individuals involved.

 

Also, it is important to note that this subject is a popular source of litigation for plaintiffs’ attorneys. Employees are afforded numerous rights under federal and state laws that do not apply to independent contractors.  As such, should an employment issue arise with a worker designated as an independent contractor, one of the first issues challenged is often whether he or she was properly classified as an independent contractor.

 

SSA members should audit the designations of their workers to ensure that they have been appropriately classified as either an “employee” or an “independent contractor.”   Additionally, that same analysis should be applied every time a new individual is retained. This exercise will reduce the issues that could arise regarding an individual worker claim or an enforcement action.  

 

It is best to consult with your labor and employment attorney to ensure an appropriate conclusion is reached.

 

To learn more about proper classification and all relevant factors to consider, review the memo HERE

 

 

 

| Categories: Legal, Operations, Legislative / Regulatory | Tags: IRS, Department of Labor, Evaluation, Employees, Contractor, Independant Contractor, 1099, W-2, designation | View Count: (238) | Return
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