Several tests can be used to determine whether an individual qualifies as an independent contractor or employee for the purposes of state and federal laws. Fundamentally, all of these tests seek to answer the question, does the company control how the work will be performed (suggesting an employer-employee relationship) or does the company deal only with the results of this work (suggesting an independent contractor relationship)?
Five of the most common tests are:
- IRS Factor Control Test (or 20 Factor Test): used in regard to IRS withholding, Immigration
- Economic Reality Test: used in regard to Fair Labor Standards Act, Workers’ Compensation, Discrimination
- Relative Nature of Work Test
- ABC Test: used in regard to Unemployment benefits
- Common Law Test (or Right to Control Test:) used in regard to Discrimination, ERISA, Worker Adjustment and Retraining Notification Act, National Labor Relations Act, Labor Management Relations Act
The test used depends upon the particular statutes or government agencies involved. Please not that these tests are only guidelines and are not applicable in every situation. Therefore, a worker may be considered an employee under one statute, but an independent contractor under another.
Misclassifying employees as independent contractors carries financial risks. In addition to penalties and fees, companies may also be charged with liabilities including back taxes and overtime. This may also open the company to lawsuits related to:
- Denial of ERISA and other benefits
- Denial of Workers’ Compensation
- Denial of Family Medical Leave Act (FMLA)
- Discrimination for failure to accommodate for a disability
- Failure to include the individual in employee count which resulted in the company appearing not to be required to comply with Title VII, ADA, ADEA, FMLA, WARN Act, Affirmative Action, or other state or federal employment laws
- Failure to retain proper tax forms for employees
- Disputed ownership of rights to completed work
For more information and relevant forms, visit http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee. For more information on this and other insurance topics and coverage, please call our office.