How to Avoid Worker Misclassification Issues

Running a business is no small feat. There are a myriad of laws, regulations, and restrictions to observe and follow, and it is easy to overlook essential statutes. In recent years, worker misclassification has not only been on the rise, but also made its way up on the IRS priority list.

Should you be uncertain about whether your worker is an independent contractor or employee, you may file Form SS-8 with the IRS. This form requests that the IRS examines and determines the status of a worker as either independent contractor or employee. In order to arrive at a well-founded conclusion, the IRS looks at three groupings of common law rules to determine the proper worker classification: behavior control, financial control, and types of relationship.

Behavior Control

Workers whose behavior and performance are strongly limited and prescribed by their employer are generally classified as employees. If there are rules that state when, where and how tasks have to be performed as well as what equipment is to be used to complete said tasks, the worker should be classified as employee. Another directive that is used to tell an employee from an independent contractor is the degree of instruction. Employees usually receive much more detailed instructions than general contractors. Likewise, an employee’s performance is evaluated on how the work is performed, whereas an independent contractor’s performance is measured on the end result.

If a business wants its workers to perform their tasks a certain way, it often provides training. Training is a strong indicator that the business wants and should classify the worker as an employee. Ongoing or periodic training on certain procedures and methods, which are to be used in order to perform the work, provides even stronger evidence of an employer-employee relationship. Independent contractors usually are free to use their own methods of executing the work given to them.

Financial Control

Financial control is slightly harder to classify and determine than behavioral control. Independent contractors are commonly thought to have significant amounts of their own money invested in tools and equipment. While this may be a good rule of thumb, it shall not be neglected to mention that construction workers, for example, often have to purchase their own tools, which can cost in excess of several thousands of dollars. Despite their significant investment they retain employee status. Thus, a significant investment can be an indicator of classification as an independent contractor, but not necessarily a determining factor.

Independent contractors are more likely than employees to incur unreimbursed expenses especially during times when business may be slow. This is not to say that employees never incur unreimbursed expenses. Very much like the significant investment, this is more an indicating and less a determining factor in classifying the worker’s status.

Opportunity for profit or loss, on the other hand, is a strong indicator of independent contractor status. If the worker’s own money has been invested in the work he performs, he is at a greater risk to lose money.

Are the worker’s services available to the market or limited to only his employer? Workers who normally distribute their work between different companies are independent contractors, whereas workers who limit their work performance to one employer count as employees. This employer will pay his employees on an ongoing basis, generally in regular intervals, such as weekly, bi-weekly or another agreed upon time frame. Independent contractors receive payment per job.