Misclassifications: Independent Contractor versus Employee
Are you considered an independent contractor or an employee? Many factors differentiate your placement.
The IRS states that a worker can be classified, but there is no definite way. Follow these three varying government agency tests by the IRS, the U.S. Department of Labor, and the National Labor Relations Board to find out.
Does your business have the right to direct and control the worker’s actions?
You are an employee under the IRS’s three main factors: behavioral control, financial control, and the type of relationship of the parties.
Based on Section 530 of the Revenue Act of 1978, P.L. 95-600, a business can be protected from payroll tax exposure by meeting three tests: reporting consistently, substantive consistency, and a reasonable basis.
Independent contractors can report compensation on 1099-NEC, Nonemployee Compensation.
Department of Labor:
Under the Fair Labor Standards Act, independent contractors are not protected for minimum wage and overtime but may still be considered an employee.
Per DOL, follow these classifications:
The services rendered align with the principal’s business;
The permanency of the relationship;
The amount of the alleged contractor’s investment in facilities and equipment;
The nature and degree of control by the principal;
The alleged contractor’s opportunities for profit and loss;
The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and
The degree of independent business organization and operation.
National Labor Relations Board:
Independent contractors are not protected by NLRB to form labor unions.
If you have an “entrepreneurial opportunity” for gain or loss, you are an independent contractor. If you are a worker with more control in the business, you are an employee.
Each state is different when classifying the type of workers.
Workers are employees unless:
They are free from the control of the hiring entity;
They perform work that is outside the usual course of the hiring entity’s business; and
They are customarily engaged in an independent trade, occupation, or business.