by Paul R. Katz

   Many companies, either intentionally or by mistake, mischaracterize individuals performing work for them. The consequences of treating an employee as an independent contractor can be quite severe. Negative consequences that can arise include disqualification of qualified retirement plans if, after taking into account reclassified workers, the plan is found to violate non-discrimination rules. Separate problems can be faced by workers if benefits are being provided on a discriminatory basis. The cost of group life insurance and amounts received under health plans could be included as income to key employees and/or highly compensated individuals. The penalty for failure to deposit the employees' and employer's share of FICA tax and income taxes that should have been withheld, can be as great as ten percent. Significantly, reclassified workers may unintentionally become eligible for stock options.
   As such, companies need to be very careful in determining whether a worker is an independent contractor or an employee. The IRS and the courts have dealt extensively with this issue and some guidelines, as follows, have been established.
   An independent contractor is generally defined as a person who is employed by another to perform work; who pursues an independent occupation or business in performing it; and who follows the employer's desires only as to the results of the work, and not as to the means by which it is to be accomplished. The most significant factor to be considered in properly classifying workers is the extent to which the employer has the right to control the manner and means by which the work is to be performed. Other factors evidencing a workers' status include the right to discharge the worker, the manner of compensation, the provision of equipment and premises, whether the work is done under direction or without supervision, and the length of time for which the services are performed. Strong evidence in support of an employment relationship is reflected in the right to discharge at will and without cause, an attribute not commonly found in contractor agreements, which generally establish specific standards of performance and deliverables.
   For instance, let's say an individual is hired as a commissioned sales person. That person owns or works for a separate company, which also does sales work for other organizations, signs an independent contractor agreement with you and agrees to produce a minimum amount of sales or face termination. On the other hand, let's say that same individual does not have a separate company, is not working for other organizations, and signs an agreement that indicates they are terminable if they don't achieve certain results. In both instances, you provide general information to the individual, but they are free to determine their hours, they work from their home or your office, as you permit, they can't misrepresent the goods and services offered or contact entities other than those within an approved territory and are provided with a 1099 and no income or FICA taxes are deducted from their income. Same person, same performance requirements, same goods, same guidance on manner and means by which the work is to be performed, same manner and amount of compensation, same results required, same location of work, similar hours, yet one will most likely be considered an employee and the other an independent contractor. The fact that one individual has a separate organization that they work for, which provides services to other customers, will likely be determinative that that individual is a contractor, while the other, an employee. The same kind of analysis would be applied regardless of the type of worker. If this analysis is applied to an installer, same result. The person that doesn't hold him/herself out as an independent business, performing work for others, will likely be held to be an employee.
   All of these indicia are intertwined and their weight depends often on the particular facts and circumstances. Ultimately, the analysis is qualitative rather than quantitative. Experienced judgment should be sought and applied.
   In a business that uses "independent" sales and technical people, properly classifying individuals up front will eliminate significant problems down the road. Many employees prefer to be classified as contractors, and while businesses receive certain benefits from issuing a 1099, the urge to go along with that approach should be restrained. At the end of the day, it is the employer not the worker that will bear the brunt of the consequences flowing from misclassifying individuals.