Independent Contractors and Employees: Understanding the Difference

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THE KAMBER LAW GROUP
A Professional
Corporation
The Law At Work.

1275 GLENLIVET DRIVE , SUITE 100
ALLENTOWN , PENNSYLVANIA 18106
TEL: 484.224.3059 | FAX: 484.224.2999
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INDEPENDENT CONTRACTOR
VS.
EMPLOYEE STATUS

Deirdre Kamber Todd, Esq.
DKamberTodd@KamberLawGroup.com

Copyright 2012 (c) Deirdre Kamber Todd 2

Independent Contractor vs.
Employee

 No one ever claims to be an employee when
they are actually an independent contractor.

 Why?

 That’s why we are here.


Areas of Practice:
• Employment and Business Law
• Social Media/Internet
• HIPAA
• Contracts
• Unemployment Compensation
Admitted: Pennsylvania, New York and U.S. Supreme Court
Expert Witness: Social Media, Lehigh County Court

Deirdre Kamber DeirdreJKamber
Kamber Law Group @DKamberTodd


What is the difference between an I.C.
and an employee?

• Generally speaking, an employee is one who is
hired to work under the direction and control of
the employer

• An employee does not represent the employer.


What is the difference between an I.C.
and an employee?

• An independent contractor is hired by an employer
to perform a specific task.

• The key distinction between an independent
contractor and an employee is that the
independent contractor performs the task
according to the contractor’s own methods – the
contractor is not controlled with respect to the job
performance


Employee Status

• Classification of a hired party as an employee or agent
(versus an independent contractor) will vary based on the
law(s) involved and the relevant criteria


THE AGENCY TESTS


IRS Test
• 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?


• Level of instruction. If the company directs when, where, and how
work is done, this control indicates a possible employment
relationship.

• Amount of training. Requesting workers to undergo company-
provided training suggests an employment relationship since the
company is directing the methods by which work is accomplished.

• Degree of business integration. Workers whose services are
integrated into business operations or significantly affect business
success are likely to be considered employees.

• Extent of personal services. Companies that insist on a particular
person performing the work assert a degree of control that suggests
an employment relationship. In contrast, independent contractors
typically are free to assign work to anyone.


• Control of assistants. If a company hires, supervises, and pays a
worker's assistants, this control indicates a possible employment
relationship. If the worker retains control over hiring, supervising, and
paying helpers, this arrangement suggests an independent contractor
relationship.

• Flexibility of schedule. People whose hours or days of work are
dictated by a company are apt to qualify as its employees.

• Continuity of relationship. A continuous relationship between a
company and a worker indicates a possible employment relationship.
However, an independent contractor arrangement can involve an
ongoing relationship for multiple, sequential projects.

• Need for on-site services. Requiring someone to work on company
premises—particularly if the work can be performed elsewhere—
indicates a possible employment relationship.


• Method of payment. Hourly, weekly, or monthly pay schedules are
characteristic of employment relationships, unless the payments simply are
a convenient way of distributing a lump-sum fee. Payment on commission
or project completion is more characteristic of independent contractor
relationships.

• Sequence of work. If a company requires work to be performed in specific
order or sequence, this control suggests an employment relationship.

• Requirements for reports. If a worker regularly must provide written or oral
reports on the status of a project, this arrangement indicates a possible
employment relationship.

• Payment of business or travel expenses. Independent contractors typically
bear the cost of travel or business expenses, and most contractors set their
fees high enough to cover these costs. Direct reimbursement of travel and
other business costs by a company suggests an employment relationship.


• Work for multiple companies. People who simultaneously provide
services for several unrelated companies are likely to qualify as
independent contractors.

• Provision of tools and materials. Workers who perform most of their
work using company-provided equipment, tools, and materials are more
likely to be considered employees. Work largely done using
independently obtained supplies or tools supports an independent
contractor finding.

• Investment in facilities. Independent contractors typically invest in and
maintain their own work facilities. In contrast, most employees rely on
their employer to provide work facilities.

• Realization of profit or loss. Workers who receive predetermined
earnings and have little chance to realize significant profit or loss through
their work generally are employees.


• Control over discharge. A company's unilateral right to discharge a
worker suggests an employment relationship. In contrast, a company's
ability to terminate independent contractor relationships generally
depends on contract terms.

• Availability to public. If a worker regularly makes services available to the
general public, this supports an independent contractor determination.

• Right of termination. Most employees unilaterally can terminate their
work for a company without liability. Independent contractors cannot
terminate services without liability, except as allowed under their
contracts.


According to the IRS
• Businesses must weigh all these factors when determining
whether a worker is an employee or independent
contractor. Some factors may indicate that the worker is an
employee, while other factors indicate that the worker is an
independent contractor. There is no “magic” or set number
of factors that “makes” the worker an employee or an
independent contractor, and no one factor stands alone in
making this determination. Also, factors which are relevant
in one situation may not be relevant in another.

• http://www.irs.gov/businesses/small/article/0,,id=99921,0
0.html


According to the US DOL

• The Supreme Court has said that there is no definition that
solves all problems relating to the employer-employee
relationship under the Fair Labor Standards Act (FLSA).

• The Court has also said that determination of the relation
cannot be based on isolated factors or upon a single
characteristic, but depends upon the circumstances of the
whole activity.

• The goal of the analysis is to determine the underlying
economic reality of the situation and whether the individual is
economically dependent on the supposed employer.


According to the US Supreme Court

The factors that the Supreme Court has considered significant:

1. The extent to which the worker's services are an integral part of
the employer's business (examples: Does the worker play an
integral role in the business by performing the primary type of
work that the employer performs for his customers or clients?
Does the worker perform a discrete job that is one part of the
business' overall process of production? Does the worker
supervise any of the company's employees?)

2. The permanency of the relationship (i.e. how long has the worker
worked for the same company?)




3. The amount of the worker's investment in facilities and
equipment (examples: Is the worker reimbursed for any
purchases or materials, supplies, etc.? Does the worker use his or
her own tools or equipment?)

4. The nature and degree of control by the principal (Examples: who
decides on what hours to be worked? Who is responsible for
quality control? Does the worker work for any other company(s)?
Who sets the pay rate?);




4. The worker's opportunities for profit and loss (Examples: did the
worker make any investments such as insurance or bonding? Can the
worker earn a profit by performing the job more efficiently or
exercising managerial skill or suffer a loss of capital investment?); and

5. The level of skill required in performing the job and the amount of
initiative, judgment, or foresight in open market competition with
others required for the success of the claimed independent
enterprise (Examples: does the worker perform routine tasks
requiring little training? Does the worker advertise independently via
yellow pages, business cards, etc.? Does the worker have a separate
business site?).


Pa Dep’t of L&I (UC LAW)
• In order to be excluded from coverage, the person who performs
the services must meet two conditions pursuant to Section
4(l)(2)(B):

– The individual must be free from control or direction
over the performance of the services involved, and

– The individual is customarily engaged in an
independently established trade, occupation,
profession or business.

• Only if both of these conditions are met to the satisfaction of the
Department will the relationship be regarded as an "independent
contractor." Unless and until those criteria are met, the services
will be "employment" subject to the coverage of the UC Law.


The following items are not conclusive in determining "independent
contractor" status:
• Employer designation, either verbally or in writing, that an
individual is an "independent contractor";
• Statement by an individual that they are an "independent
contractor";
• Issuance of a Federal Form 1099.
• A written agreement does not prohibit an examination of the facts
to determine whether the performance of the services is subject
to control or direction of the employer. If the examination shows
either the exercise of or the right to exercise such control or
direction, then the worker would be considered an employee and
not an independent contractor.
• It is immaterial if the services are performed on a full-time, part-
time or casual basis.


• Issues surrounding "independent contractor" status normally arise
out of random employer audits or unemployment claims filed by
individuals who assert they were employees rather than
"independent contractors."

• The Office of UC Tax Services randomly selects employers for audit
to verify compliance with the UC Law.

• If issues arise concerning employee status such as those listed, an
employer should have sufficient documentation to support the
reasons for classifying an individual as an "independent
contractor."

• The Department will use all available information to determine a
worker’s status.


• The presumption of the UC Law confers automatic employee
status unless and until it is proven otherwise to the satisfaction of
the Department.

• Examples of relevant documentation would include copies of the
individual’s preprinted invoices, business forms and stationery,
Federal and State tax ID numbers, business telephone directory
listings, public advertisements soliciting business, Articles of
Incorporation and leases on business properties.


Other Issues

• Non-competition

• Advertising On Facebook and other Social Media (i.e. Morse
v. Mer)

• Contracts

• Opening Door To Larger Issues

• Back Taxes, Wages, UC, WC, Etc.


• The IRS launched a national research project in which it
sent thousands of audit letters to employers.

• The IRS signed an MOU with the U.S. Department of
Labor to share information between them to reduce
misclassification.

• Employers may now reclassify independent contractors
as employees and limit the resulting federal payroll
taxes for their most recent tax year, plus avoid related
penalties and interest for prior years, under an IRS
program announced Wednesday.

• In Announcement 2011-64, the IRS outlined its new
Voluntary Classification Settlement Program (VCSP).


• Employers can apply for the program using Form 8952,
Application for Voluntary Classification Settlement
Program, at least 60 days before they want to begin
treating the workers as employees.

• Unlike an existing settlement program for employers under
an IRS examination, the VCSP allows eligible taxpayers to
voluntarily enter into an agreement with the IRS.

• To participate, employers must submit an application and
agree to prospectively treat their workers or a class or
group of workers as employees in future tax periods.

• Employers must also agree to extend the period of
limitation on assessment of employment taxes for three
years three years.


• Employers will pay 10% of the employment tax liability
otherwise due for the most recent tax year, which will
not be subject to interest or penalties.

• The IRS does not conduct an employment tax audit with
respect to the employer’s worker classification for prior
years.

• Employers whose worker classification has been
previously audited must have complied with results of
the audit. Also, employers must have consistently
treated workers as nonemployees, for whom they must
have filed all required Forms 1099 for the previous three
years.


• The employment tax liability for the most recent year is
determined under the reduced rates of IRC § 3509, which
provides that:
– failure to deduct and withhold taxes arising from a worker
misclassification, the employer’s liability for the employee’s
portion of FICA tax is limited to 20% of the normal employee
FICA tax.

• This percentage is doubled for disregard or willful neglect
of reporting requirements.

• To be eligible for the program, employers must not
currently be under audit by the IRS, the Labor Department
or a state agency concerning worker classification.


Questions?
Comments?

The Kamber Law Group, P.C.
DKamberTodd@KamberLawGroup.com

1275 Glenlivet Drive, Suite 100
Allentown, PA 18106
Tel: 484.224.3059  Fax: 484.224.2999


Independent Contractors and Employees: Understanding the Difference

Independent Contractors and Employees: Understanding the Difference

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