The differentiation between an independent contractor and an employee is a criti
ID: 396314 • Letter: T
Question
The differentiation between an independent contractor and an employee is a critical one for any employer to make. Furthermore, this choice can have significant implications for the business regarding additional fees and taxes. In this situation, Karen was initially hired as a temporary employee. Moreover, Karen has functioned as an independent contractor for 5 years. If one were to look at her employment status, they would see that Karen has additional clients outside of the local utility as well as the fact that she has not received benefits or proper tax documentation for this period time. For these reasons, Karen should be classified as an independent contractor for the local utility.
Does the fact that Karen has clients outside the local utility and doesn't receive benefits mean that she is not "legally" defined as an employee. What would a court consider in making this determination? What would the IRS consider?
Explanation / Answer
Karen having clients outside the local utility does mean that she is not defined as an employee. Classification by IRS on the basis of financial, and, behavioural control, and, the relationship:
There are different criteria that the IRS, the courts, and, other agencies use but the common criteria are the common law right to control standard. There are issues with right to exercise, and, defining control. The criteria are whether the employees work on a regular basis; use tools provided from the employer; workers' investment in the business; whether individuals stand to gain or lose from the effort. These are part of the economic reality test. There is no consistency in definitions.
25 of the states use common law criteria for the state unemployment tax. In case of an employee, the employer has the right to direct the means of production. Twenty two states use the ABC test; 10 use two of the three tests. District of Columbia, and, 18 states use the common law criteria. IRS uses a twenty factor test. A worker is eligible for FLSA; NLRA; Age Discrimination in Employment Act; Title VII of the Civil Rights Act.
IRS definition
Financial Control
Relationship
Behavioural Control