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Will Your Company

Will Your Company's Designation of "Independent Contractors" Stand Up to Department of Labor or IRS Scrutiny?

The Inside Perspective
(March 14, 2016)

The share economy and the proliferation of new business models have brought renewed interest from plaintiffs and government agencies into how businesses classify their workers. Lawsuits involving transportation upstarts Lyft and Uber have grabbed headlines, but employers across broad industries have faced litigation on this point, too. Whether your business is established or just getting off the ground, it is critical to review the classification of your company's workers.

The damages and penalties for misclassifying an employee as an independent contractor can be serious—and expensive. A business—and individuals—can be liable for years of unpaid state and federal taxes (plus interest), FICA withholdings, workers' compensation benefits, unemployment benefits, overtime, and fines. These costs significantly multiply when a business unit or group of workers is misclassified.

Traditionally, the DOL and the IRS have used a multi-part analysis focused on these factors, considered in combination with each other:

  1. The extent to which the services rendered are an integral part of the principal's business. 
  2. The duration, ongoing or temporary, of the relationship between the worker and the company. 
  3. The amount of the alleged contractor's investment in facilities and equipment. 
  4. The nature and degree of control by the business. 
  5. Whether the alleged contractor's managerial skills affect his or her opportunities for profit and loss. 
  6. The amount of skill, initiative, judgment, or foresight exercised by the worker and whether the worker exercises such in an independent business, as opposed to being economically dependent on this company. 
  7. The degree of independent business organization and operation.

The Department of Labor has now published guidance stating that it intends to treat most workers as employees wherever the "economic reality" is that the worker is dependent on the company for income. This position signals a presumption by the DOL that, as it considers the factors listed above, it will primarily decide that where all of a worker's pay comes from one entity, he or she is that entity's employee.

TIP: Avoid penalties—and potential litigation—by carefully analyzing all independent contractor arrangements based upon whether, as an economic reality, the worker is dependent on the company for his or her pay.


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