As business lawyers in Houston, Texas, we are often asked how to determine whether people who work for a client should be considered independent contractors or employees. The IRS defines an “independent contractor” as one who offers their services to the public and that the employer has the right to control or direct the result of the work but not the means and methods of accomplishing the result. The IRS determines employee status by assessing the relationship between the worker and the employer for which he works. The factors considered by the IRS are:
• how much influence the employer exerts over how, when and where the work is performed;
• how much influence the employer exerts over the equipment to use, workers to hire or use, and the supplies or services used;
• how much influence the employer exerts over the sequence of the work to be accomplished; and
• whether the employer trains the worker or requires the worker to use his existing skills.
• whether there are expenses incurred in the performance of the job that the employer does not reimburse the worker for;
• whether there are there fixed ongoing costs incurred regardless of whether work is currently being performed;
• the extent of the worker’s investment in facilities used;
• the extent to which the worker makes his services available to the open market, how often he advertises, whether he maintains a separate business location, and whether he is allowed to accept additional business opportunities; and
• the method in which the employer pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. An independent contractor is usually paid by a flat fee for the job.
Type of relationship:
• whether there is a written contract;
• whether the worker receives employee-type benefits (insurance, pension plan, vacation and sick pay);
• the permanency of the relationship – if an employer engages a worker with the expectation that the relationship will continue indefinitely, that workers is usually an employee rather than an independent contractor;
• the extent to which the services performed by the worker are essential to the regular business operation. The more essential the services the worker provides, the more likely that the worker is an employee rather than an independent contractor.
If a company misclassifies a person as an independent contractor without a reasonable basis for doing so, the company may be liable for employment taxes for that worker. The IRS provides relief provisions if a company has a reasonable basis for not treating a worker as an employee. To be relieved of the liability of the employment taxes for that worker, the company must:
1. File all required federal information returns on a basis consistent with the treatment of the worker.
2. The company must not have treated any similar worker holding a substantially similar position as an employee or any period beginning after 1977.
Some courts rely on the IRS analysis of who is an employee and who is a contractor. However, not for all purposes. If you have an issue that requires you to determine the status of a person working for you, consult a qualified business attorney in your jurisdiction.