BUSINESS LAW 101

Employee/Independent Contractor

BY ALBERT L. KELLEY

Now that we have touched on principal and agent, let’s look at employment. An employee is one who works at the direction and control of an employer. This is opposed to an independent contractor who works at their own direction. The difference between the two is important, primarily for liability and tax purposes.

An employer has to pay employment and unemployment compensation tax for employees. All the employer has to do for independent contractors is send them an IRS Form 1099, showing how much they were paid. The independent contractor is liable for his own taxes and social security filing.

While employers are responsible for the actions of their employees, contractors are generally liable for their own actions. If an employee causes an accident, the employer is generally liable; if an independent contractor causes an accident, the contractor is liable.

However, just because there are benefits it doesn’t mean you can simply call your employees independent contractors. There are restrictions. The Internal Revenue Service has developed what is referred to as the 20-question test for determining whether a person is an employee or independent contractor. While this is not an absolute test, if less than 11 of the factors indicate an independent contractor, the IRS will likely look at the person as an employee.

For the following questions, a “yes” answer indicates the worker is an employee.

. Does the principal provide instructions to the worker about when, where, and how he or she is to perform the work?

. Does the principal provide training to the worker?

. Are the services provided by the worker integrated into the principal’s business operations?

. Must the services be rendered personally by the worker?

. Does the principal hire, supervise and pay assistants to the worker?

. Is there a continuing relationship between the principal and the worker?

. Does the principal set the work hours and schedule?

. Does the worker devote substantially full time to the business of the principal?

. Is the work performed on the principal’s premises?

. Is the worker required to perform the services in an order or sequence set by the principal?

. Is the worker required to submit oral or written reports to the principal?

. Is the worker paid by the hour, week, or month?

. Does the principal have the right to discharge the worker at will?

. Can the worker terminate his or her relationship with the principal any time he or she wishes without incurring liability to the principal?

. Does the principal pay the business or traveling expenses of the worker?

For the following questions, a “yes” answer indicates the worker is an independent contractor.

. Does the worker furnish significant tools, materials and equipment?

. Does the worker have a significant investment in facilities?

. Can the worker realize a profit or loss as a result of his or her services?

. Does the worker provide services for more than one firm at a time?

. Does the worker make his or her services available to the general public?

 

If it is determined that the employer has been treating the person as an independent contractor, rather than an employee, the IRS may fine the employer for a portion of the independent contractor’s salary, plus part of the worker’s share of FICA and Medicare, plus part of the worker’s withholding taxes, plus FUTA tax, plus additional penalties (both civil and criminal) and interest. In addition to all of the above, the worker may sue the employer for the employer’s portion of withholding tax. Because the IRS loses $1.5 billion a year in misclassified employees, there is a strong incentive for them to correct this.

 

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is also the author of “Basics of Business Law” and “Basics of Florida’s Small Claims Court” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.

 

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