Employee or Independent Contractor?

By: Rachel Dickey 

For many Louisville, Kentucky entrepreneurs and business owners, the cost of hiring an employee is daunting and many decide to simply bring on independent contractors.  Sure, it’s nice not paying employment taxes or overtime, or supplying health insurance and workers compensation benefits etc. However, calling a worker an independent contract doesn’t make them an independent contractor.  It is the nature of the relationship, not the label that matters. 

A Wage and Hour Division Investigation in 2015 resulted in more than 74 million dollars in back wages for more than 102,000 employees, who were primarily in low income jobs.  They found that many  businesses intentionally mislabeled their employees as independent contractors to reduce costs and in turn deprived workers of their rights as employees, including their right to a fair wage. Given the misclassification epidemic, proper classification is all the more important as government agencies crack down.

Unfortunately, there is no clear line that determines when a worker should be classified as an employee or independent contractor and each situation must be looked at on a case by case basis.  Generally speaking, the more control the company has over the worker, the more likely the I.R.S. will treat them as an employee. (Here is some guidance from the I.R.S.). The Department of Labor uses a separate standard to determine if an individual is properly classified as an independent contractor under the Fair Labor Standards Act.  A discussion of that test will be the feature of a future post. 

Below are ten questions to serve as a starting point for determining how the I.R.S. will classified the individual. The more "yes" answers, the more likely a worker will be considered an employee by the I.R.S. However, as previously mentioned, this determination is made on a case by case basis and speaking with an attorney can help you weigh the various factors to determine the appropriate designation.

1.     Does the company control the day to day activities of the worker (e.g. you must   arrive by 9 and stay until 5)?

2.     Does the company provide the worker’s equipment and supplies?

3.     Does the company provide training on job specifics and expectations?

4.     Is the worker paid on a set schedule (e.g. via biweekly payroll)?

5.     Does the worker work solely for the company and have no other clients?

6.     Is the company in charge of hiring individuals to work with or to help the worker perform their job?

7.     Does the company reimburse all of the worker’s expenses?

8.     Does the company, rather than the individual worker, stand to suffer the loss of the worker’s non-performance?

9.     Does the company treat other workers doing similar activities as employees rather than independent contractors?

10.   Is the work performed by the worker an integral part of the company’s business?

If you are an independent contractor and you want to learn more about the self employment tax, visit this link.