This is a sponsored column by attorneys John Berry and Kimberly Berry of Berry & Berry, PLLC, an employment and labor law firm located in Reston Town Center that specializes in federal employee, security clearance, retirement, and private sector employee matters. They write weekly on Reston Now.
Legal issues involving whether an individual was correctly hired as an independent contractor or employee often arise for many businesses and individuals. The problem with an independent contractor’s or employee’s status is often not recognized until the individual separates or is released from his or her position and subsequently contends that the business either owes the individual compensation (e.g., unpaid wages, overtime, etc.) or should have paid and deducted taxes because the individual was really an employee rather than an independent contractor.
Independent contractors are self-employed and pay their own taxes. Businesses do not need to set aside payroll taxes for or provide minimum wage or overtime to independent contractors.
Individuals asserting their employee status often bring wage and tax claims to their local wage and hour office, the Department of Labor (DOL), the Internal Revenue Service (IRS), and other agencies in an attempt to resolve a dispute with their employer. When the DOL, IRS, or state wage and hour office reviews these types of disputes, the agency typically applies its own test to determine whether the business should have classified the individual as an employee. In our experience, we have found that when the issue is unclear or debatable, government agencies tend to find that the individual was an employee.
Although each agency has its own separate test and each test varies, some of the major issues that the DOL, IRS, and other wage/hour offices consider in evaluating independent contractor and employee status include the following:
- The extent to which an individual’s services are “an integral part” of the employer’s business. For example, an agency will look at whether the individual supervises any company employees or provides primary services.
- The length of time that the individual has worked for the same business. If an individual has performed work for an employer for a long period of time, the individual is more likely to be considered an employee.
- Whether the individual uses his or her own equipment or the employer’s equipment. The agency will determine whether the individual has his or her own office offsite or whether the individual performs the work at the employer’s office. If the business provides the office space or tools to perform the work, the business is more likely to be considered an employer of the individual.
- Whether the individual is reimbursed for materials or supplies in performing the work. If an employer reimburses an individual for expenses related to work materials and supplies, the individual is more likely to be considered an employee.
- Whether the individual decides on the hours he/she works or the business sets the individual’s hours. This is an important consideration. If the business sets the hours of work for an individual, then he or she is more likely to be considered an employee.
- Whether the individual invests in insurance, advertising, business cards or bonding. It can help to establish that the individual is an independent contractor if the individual maintains these types of expenses on his or her own.
- Whether the individual performs work for other businesses. If the individual works for more than one business, such information can be used to argue that the individual is an independent contractor.
- The level of skill needed to perform the work for the business. Government agencies usually find that if less skill is needed to perform the work (e.g., general clerical), then it is less likely that the individual is an independent contractor.
- Whether the individual or the business provides training. If the individual provides his or her own training, it would be a factor in showing that the individual is likely an independent contractor and not an employee. However, if the business pays for the individual’s training, then the individual would likely be considered an employee.
- Whether the individual was paid a flat fee or hourly for work. While not determinative, if an individual is paid hourly then it is more likely that the individual is an employee.
When an individual is incorrectly classified, the risks are usually high and the outcome can be significant if the business and the individual contest or dispute the individual’s independent contractor or employee status. Therefore, it is important for businesses and individuals to correctly classify whether an individual is an employee or independent contractor before work begins.
If an employer ultimately has to provide back pay, damages, pay back taxes and/or pay penalties, the costs to the employer can be significant. Conversely, if an individual should have been classified as an employee but did not understand the difference at the beginning of his or her employment, the costs to the individual in paying his or her own taxes can be significant as well.
We recommend that businesses and individuals obtain legal advice early on to avoid wage and hour issues that may arise later involving disputes over whether the individual was an employee or independent contractor.
We have represented both businesses and individuals regarding disputes over an individual’s employee or contractor status. If you are interested in obtaining legal advice, please contact our office at www.berrylegal.com or (703) 668-0070 to schedule a consultation. Please also visit us on Facebook.
Please be advised that this information is strictly for informational purposes only and does not constitute legal advice.