When an employee isn’t an employee

Columns - Industry Voices

February 23, 2012

Steve Cesare

Over the past couple of weeks I have received a large number of comments from landscapers stating they want to fill staffing vacancies with independent contractors.

By hiring independent contractors, companies can avoid paying burdensome administrative costs that will improve their profit margin. Yet, if the IRS or a state agency determines the independent contractor position should be classified as an employee, the company will face sizable fines, tax liabilities, interest charges and retroactive benefits costs.

Employer control. The IRS has determined that an independent contractor can be a legal solution if the hiring company satisfies three rigorous tests: behavioral control, financial control and type of employment relationship. These three tests are presented in Form SS-8, which can be downloaded from the IRS website. A company should review this form for every potential independent contractor.

In short, if the employer exerts control over the worker, the worker should be classified as an employee. Conversely, if the worker demonstrates control over his/her own work habits, the worker may be considered an independent contractor.

When preparing to classify a worker as an independent contractor, the company must ask the following 11 questions that correspond to the three IRS tests before making an advanced decision:

1) Does your company provide the worker with direction about required work hours, where the work must be done, or the sequence in which the work must be completed; let the worker use company tools, materials, or equipment; or specify where the worker must purchase supplies?

2) Does your company provide any training to the worker?

3) Does your company reimburse the worker for job-related expenses?

4) Does your company have more equipment, resources, or materials invested in the work being performed than the worker does?

5) Does your company insist the worker work only for your company throughout the duration of the contract?

6) Does your company pay the worker without first receiving an invoice?

7) Does your company have more profit and loss concerns for the work being performed, than the worker actually doing the work?

8) Does your company allow the worker to perform work without first signing a thorough Independent Contractor Agreement?

9) Does your company provide benefits (e.g., medical, 401k, workers’ compensation, vacation) to the worker?

10) Does your company plan to provide continuous work for the worker beyond the completion date of the current project?

11) Does your company expect the worker to perform functions that are a key aspect of regular business operations?

If the answer is “yes” to any of those questions, the worker may actually be an employee, instead of an independent contractor. The more “yes” responses there are, the more certain the “employee’s” status becomes.

Actions to Avoid. Even when a company correctly classifies a worker as an independent contractor, certain actions can still create ambiguity regarding the worker’s employment status. As such, the following key actions identify what a company must not do when dealing with an independent contractor:

  • Subject the independent contractor to the same management control as an employee
  • Employ an independent contractor lacking an IRS Employer Identification Number
  • Introduce the independent contractor as an “employee” to anyone
  • Allow the independent contractor to do the same work as company employees
  • Distribute a company badge, uniform or vehicle to the independent contractor
  • Hire an independent contractor who has not first completed the IRS W9 Form
  • Represent the sole source of financial income for the independent contractor
  • Invite the independent contractor to “employee” social functions
  • Give a company employee handbook to the independent contractor
  • Hold the independent contractor to the company’s attendance, discipline or moonlighting policies

Summary. To accurately select an independent contractor, extensive consideration must be applied to the position classification process, the content of the Independent Contractor Agreement and performance accountabilities.

A situation with this much impact should be discussed with a qualified lawyer, human resources professional and accountant before making a final decision.

Steve Cesare is an industrial psychologist with the Harvest Group, a landscape consulting group. Send your HR questions to cesare@gie.net.