Recently, I have read several articles discussing what is becoming referred to as the "On Demand Workplace." probably the best article was in the Economist a few weeks ago. Although this phenomenon has a new fancy name, it is really the same old issue of characterizing workers as employees or independent contractors. Often companies prefer to hire independent contractors because they are not required to withhold taxes and they are not required to provide benefits or healthcare insurance to them. The trouble comes when companies mischaracterize workers. The IRS can impose fines and groups of the misclassified workers sometimes bring lawsuits. Just last week Lowe's settled a dispute with a group of disgruntled "misclassified" employees for $10M, which was written about by Forbes.

I believe that most small businesses actually want to limit costs, maximize profit, maintain core workers, and create a fair workplace – and that these are generally worthy goals. But man is creating such a Utopian environment harder than it sounds! Setting aside the politics and societal aspirations on the issue, how then can you tell whether a worker is actually an employee or an independent contractor?

The determination of which way a worker should be classified is driven by state law – but many states are quite similar in how they look at the issue. In Tennessee, the Department of Labor has published a very useful list of characteristics of each type of worker. The following checklist can be found on the Department of Labor's website:

Independent Contractor

  • Free from direction and control
  • Has necessary skills and training to complete job
  • Has a business location
  • Performs services for multiple customers
  • Sets own hours
  • Determines own price for contracted services
  • Not eligible for employee benefits
  • Provides equipment and tools used to complete job
  • Supplies materials needed to do job
  • Personally liable for errors and/or accidents
  • Files self-employment taxes
  • Has right to hire and fire workers
  • Must legally complete each contract

Employee

  • Means and manner of work are (or can be) controlled by employer
  • May be trained by employer to perform job
  • May work at employer's business location
  • Works for one employer, may serve that employer's customers
  • Hours set by employer
  • Accepts wage, salary, or commission determined by the employer
  • Employer may provide and control equipment and tools
  • Employer may purchase materials and supplies
  • Employer liable for employee errors and/or accidents
  • Is hired and can be fired by employer
  • May quit working for an employer at any time
  • Employer may require specific attire to be worn while at work such as a uniform or shirts with company logo

The closer your worker is to one or the other category, the more likely your worker fits that category. The IRS has also published a useful guide for making this determination as well, which divides the analysis into three inquiries. The links below direct to the IRS guides for each of the inquiries.

  • Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  • Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

It's a crazy new world out there, even if it is the same as ever. ~ TechAttaché

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