Independent Contractors (employees who receive 1099s) are a topic that much is written about, but still there is a great deal of confusion in the workplace.
Part of the problem is that everyone would like a simple question or checklist that clearly states “this is an employee” or “this is an independent contractor.” In fact, the Internal Revenue Service had such a test, commonly known as the “20-Factor Test” and most Human Resource departments and companies referred to this test to help make their decision of choosing employee or 1099 independent.
After years of arguments about use of the test, the Supreme Court has ruled that there is no definition that solves all problems relating to the employer-employee relationship under the Fair Labor Standards Act (FLSA). The Court also said that determination of the relationship cannot be based upon isolated factors or a single characteristic, but depends upon the circumstances of the whole situation.
This didn’t make things any clearer, so under pressure from Congress and representatives of labor and business, the IRS has attempted to clarify and simplify the test. The result is guidance based upon 11 main tests that are organized into three groups: Behavioral Control, Financial Control, and the Type of Relationship between the parties.
Along with these guidelines, we have seen an increase in both investigation and enforcement of companies using Independent Contractors.
Below are brief summaries of the three groups and questions you should ask;
- Behavioral Control –This includes instructions the business gives the worker. Do you provide instructions about when, where or how to do the work?
- Financial Control – How do you pay the worker? Who sets the pay? Are they reimbursed for expenses? What is the extent of the worker’s investment?
- Type of Relationship – What is the permanency of the relationship? What is the extent to which services performed by the worker are a key aspect of the regular business of the company? Are there contracts created by both parties?
A word of warning: while researching this topic I have seen the following mentioned several times in IRS publications: “Do not underestimate the difficulty of applying these standards to specific individuals performing services.”
For more detail, including the complete tests with all questions, or if you have concerns about your use of Independent Contractors, contact BCN Services for an in-depth review and discussion. Please contact us at 1-800-891-9911 or contact us by clicking here.