In part one of this article, we discussed the situation of properly classifying workers. In this part, we discuss a method for making that distinction.

In the U.S., common law helps determine worker status. Some confusion is created by improper focus on a given work relationship. Instead of a narrow focus, proper worker classification is a result of looking at the total work situation in which an individual performs a job. Essentially, classification is a matter of control. Specifically, consider the following areas:

Behavioral – Who has primary control over how work is done, the business or the worker?

Financial – Who controls how a worker is paid, how are expenses handled, who is responsible for supplies and tools that are needed for work?

Relationship – What defines the work relationship, manner of pay, what benefits are in place, does worker have paid vacation and what is the nature of the relationship?

It’s important that all the above factors be considered when evaluating a worker classification.

Evaluation should be performed on a simple scale. The greater the control by a given party determines how to make a classification. If a business exerts the greater overall control, the worker is an employee. If the individual worker exerts the greater overall control, the worker is an independent contractor.

Practically speaking, areas of control involve the level of freedom a worker has in getting tasks done, but another element is the nature of the work. Some businesses want to minimize both their tax liability and legal liability (and related payroll costs) by use of independent contractors. However, the situation can’t be a façade. If workers have an ongoing relationship with the applicable business because the work is normal for that business, likely the work involves employees. When the work is unusual for the given business and lasts for a short period, especially when it involves specialize labor or skills not existing in that business, the work likely involves independent contractors.

If a business or a worker is unclear over a classification, help is available from the IRS. Specifically, a work situation description can be submitted to the IRS to get its interpretation. Having that department’s help (and documentation) for a situation could be quite helpful in dealing with both tax and insurance matters.

 

Return to Section 1

 

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