With tax time upon us once again, the IRS is warning against businesses declaring employees as independent contractors. As businesses try to save money and cut back the amount they pay employees, hiring new talent as independent contractors can be a great, legal way to get around a lot of expensive additions like mandatory overtime and health insurance. But many businesses have begun stretching the definition of what constitutes an independent contractor. The IRS is cracking down with increased penalties to combat the problem.
According to statements issued by the IRS, the number of Fair Labor Stand¬ards Act case filings involving misclassification challenges has nearly quadrupled since the late 1990s. It was up over 20% in 2010 alone. And the IRS says it plans to audit 6,000 businesses by 2013 to determine whether taxes, fines, overtime pay and penalties may be due. State agencies are planning to do the same. While employers should strive to avoid these penalties, many still misclassify workers as independent contractors when they are really employees under the law?
There Is No Simple Test: Employment law is complex and there is no one fact or factor that makes an independent contractor. Every case has to be examined and determined differently.
Most Cases Are Examined Using 3 Factors: When determining what kind or classification of worker you have, most cases can be examined using 3 factors. Asking yourself the following questions can begin the process of determining where you stand: 1) to what degree does the company direct or control how and when work is performed? 2) does the company direct or control the business or financial aspects of a worker’s activities? 3) what are the indications of both parties’ perception of their relationship? As you can see, the degree of control exercised over the worker is a key focus – the more restricted a worker is, the more likely they are to be classified as an employee.
Are Your Freelancers Truly Free? The FLSA provides an additional test to employers. Are your freelancers free to conduct business outside of your organization? Are they financially dependent on you and you alone for their income? These factors may also be considered in trying to determine whether a worker is truly an independent contractor – whether the examining eye is the IRS or a private wage and hour attorney seeking to recover unpaid overtime for misclassified workers.