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But when it comes to Employee vs. Independent Contractor…disguises just don’t work! 1
PowerPoint Presentation
But when it comes to Employee vs. Independent Contractordisguises just dont work!1Are You Sure Your Independent Contractors Are NOT Your Employees?Jim Whitton, AttorneyBrackett & Ellis, P.C.
2Why is this important?
3According to the 2010 Census Report10.3 Million Workers Classify Themselves as Independent Contractors
4According to estimates from the Government Accountability Office$2.72 billionin lost revenuesfor the federal government
5Federal lawmakers
Private Individuals
Federal and State Agencies
6Joint Initiative Between DOL and IRSSix page MOU signed September 19, 2011 bythe Commissioner of Internal Revenue and the Secretary of Labor
7DOL Strategic Plan for Fiscal 2011-2016 targets specific industriesConstructionJanitorialHome health careChild careTransportation and warehousingMeat and poultry processingProfessional and personal service industries
8BUTCOLLEGES AND SCHOOL DISTRICTS ARE NOT
9Independent ContractorEmployeeNo withholding is requiredWithhold taxes such as federal income tax, unemployment taxPayments reported on a Form 1099Payments and taxes reported on a Form W-2Generally not entitled to benefits such as sick days, retirement, and insurance.Generally entitled to benefits and most are covered by the Teacher Retirement System of Texas (TRS)Do not benefit from legal protections, ex. workers compensationEnjoy various legal protections when serving in their role as a public school employee10Education institutions are being investigated by our friends at the Internal Revenue Service (IRS) for incorrectly classifying individuals as independent contractors when they should be paid as employees.
11In an audit, no stone is left unturnedAll payroll records, journals, and other records of compensationGeneral ledgerCash disbursement journal/check registerForms w-2,w-3,w-4, 1099, etc.Annual financial reportCopies of all contractor contractsList of all people who paid rent for use of facilities, equipment, etc.Vehicle usage and policiesEmployee HandbookExpense reimbursementsVendor lists
And the list goes on.
12Why use Independent Contractors?
13Benefits of Independent ContractorsFlexibility14Benefits of Independent ContractorsFlexibility
No income taxes withholdings15Benefits of Independent ContractorsFlexibility
No income taxes withholdings
No payment of payroll taxes or unemployment insurance premiums16Benefits of Independent ContractorsFlexibility
No income taxes withholdings
No payment of payroll taxes or unemployment insurance premiums
Avoid benefit costs
17Benefits of Independent ContractorsFlexibility
No income taxes withholdings
No payment of payroll taxes or unemployment insurance premiums
Avoid benefit costs
No need for training
18Benefits of Independent ContractorsFlexibility
No income taxes withholdings
No payment of payroll taxes or unemployment insurance premiums
Avoid benefit costs
No need for training
Not liable (usually) for worker torts
19Benefits of Independent ContractorsFlexibility
No income taxes withholdings
No payment of payroll taxes or unemployment insurance premiums
Avoid benefit costs
No need for training
Not liable (usually) for worker torts
Avoid liability for employment-based claims
20Disadvantages of Independent Contractorsloss of control over workers
less stable work force
decreased worker loyalty
And . 21Misclassification Issues
22Misclassification IssuesTax
23Misclassification IssuesTaxFLSA
24Misclassification IssuesTaxFLSABenefit/ERISA25Misclassification IssuesTaxFLSABenefit/ERISAOther employment laws26Misclassification IssuesTaxFLSABenefit/ERISAOther employment lawsUnknown/Unforeseen exposure
27Misclassification IssuesTaxFLSABenefit/ERISAOther employment lawsUnknown/Unforeseen exposure28Misclassification IssuesTaxFLSABenefit/ERISAOther employment lawsUnknown/Unforeseen exposureDomino Effect
29Are your workers independent contractors?
30Worker Status TestsCommon Law Right to Control Test
Economic Realities Test
Hybrid Test
IRS Test
TWC Test31Right to Control Test
32Right to Control TestDoes the college or district instruct the individual as to when, where, and how work is performed?Is the work usually done under the direction of the college or district? Who supplies tools and materials? Does the college or district set the hours of work?Is the work performed on college or district property?What specific training and/or instruction does the college or district provide?Does the college or district pay the individual by the hour, by daily rate, by the week, or by month?Is the work part of the regular business?What is the intent/belief of the parties?
33Economic Realities TestEmployee benefitsFLSA FMLA
34Economic Realities TestDoes the college or district have the right to control the manner and means by which the product is accomplished?What is the level of skill required?What is the source of the instrumentalities and tools?What is the duration of the relationship between the parties?Does the college or district have the right to assign additional projects to the individual?What is the extent of the individuals discretion over when and how long to work?What is the method of payment?What is the individual's role in hiring and paying assistants?Is the work part of the regular business of the college or district?Is there the provision of employee benefits?What is the tax treatment of the individual?
35The Hybrid TestCombines Right to Control and Economic Realities Test
Commonly used in Title VII (discrimination) cases
36The IRS TestBehavioral control
Financial control
Type of relationship of the parties
37Behavior ControlDoes the college or district have a right to direct and control task performed?Considers instructionsWhen and where does the work occur?What tools or equipment to use?What workers to hire or to assist with the work?Where to purchase supplies and services?What work must be performed by a specified individual?What order or sequence to follow?Training provided
38Financial ControlFocuses on facts that show a workers opportunity to realize a profit or loss
Examines extent the worker has unreimbursed business expenses
Considers the extent of the worker's investment
Considers extent the worker makes services available to the relevant market
Examines how the business pays the worker39Type of RelationshipWritten contracts describing the relationship the parties intended to create
Whether the college or district provides the individual with employee-type benefits such as insurance, a pension plan, vacation pay, or sick pay
What is the permanency of the relationship?
The extent to which services performed by the worker are a key aspect of the regular business of the college or district
40Texas Workforce Commission TestUnder the Act, employment means a service, including service in interstate commerce, performed by an individual for wages or under a express or implied contract of hire, unless it is shown to the satisfaction of the Commission that the individuals performance of the service has been and will continue to be free from control or direction under the contract and in factAdopted old IRS 20-Factor Test
41What can we do to reduce risks and liabilities?
42Playing it Safe
Consistency in your reporting
Educate your campus and administrators
Treat all workers who perform similar service the same
Go through the factors to determineRight to control behaviorRight to control financial aspectsThe nature of the relationship
Make certain your method of performing criminal background checks is aligned
And
43Reducing Misclassification Risks and Liabilities Know your workforce
44Reducing Misclassification Risks and Liabilities Know your workforcePay attention to your contracts
45Contracts for IC Avoid using the word control and similar terminology.State that the IC controls manner and means of work.Make clear that the college or district is only interested in the result.Specifically state that the relationship is one of independent contractor.Use ICs business format (i.e. corporation, LLC, LLP).Make payments to the workers business entity, as opposed to the individual.Place responsibility for taxes, insurance, business licenses on IC Make IC responsible for own employees, general liability insurance, unemployment and workers compensation or non-subscriber alternative plans for any of their own employees, and all applicable taxes for his/her employees.Require only compliance with industry standards.Do not require progress reports or performance reviews.Avoid payment by the hour, day or week. Pay by the project or task.Avoid requiring specific hours or days to work.Avoid requiring specific location where the work must take place, if possible.Specifically state IC to provide his/her own tools, equipment, supplies and related items.Include a waiver of any right to participate in any college or district benefits.Specify the length of the relationship, rather than an indefinite period of time.Specify that IC can provide services to others.Avoid contract provisions allowing for termination at will.Specify cause for contract termination.Specify IC responsible for own training, continuing education.
46Reducing Misclassification Risks and Liabilities Know your workforcePay attention to your contractsEducate campus and administrators
47Reducing Misclassification Risks and Liabilities Know your workforcePay attention to your contractsEducate campus and administratorsConduct internal audits
48Reducing Misclassification Risks and Liabilities Know your workforcePay attention to your contractsEducate campus and administratorsConduct internal auditsReview employee compensation policies
49Reducing Misclassification Risks and Liabilities Know your workforcePay attention to your contractsEducate campus and administratorsConduct internal auditsReview employee compensation policiesReview ERISA plans
50Reducing Misclassification Risks and Liabilities Know your workforcePay attention to your contractsEducate campus and administratorsConduct internal auditsReview employee compensation policiesReview ERISA plans
Consider an internal complaint process51Reducing Misclassification Risks and Liabilities Know your workforcePay attention to your contractsEducate campus and administratorsConduct internal auditsReview employee compensation policiesReview ERISA plans
Consider an internal complaint processBe careful of reemployment of former employees52Reducing Misclassification Risks and Liabilities Know your workforcePay attention to your contractsEducate campus and administratorsConduct internal auditsReview employee compensation policiesReview ERISA plans
Consider an internal complaint processBe careful of reemployment of former employeesChange business model53Reducing Misclassification Risks and Liabilities Know your workforcePay attention to your contractsEducate campus and administratorsConduct internal auditsReview employee compensation policiesReview ERISA plans
Consider an internal complaint processBe careful of reemployment of former employeesChange business modelTake advantage of IRS provisions5455
Questions?56#399964Jim WhittonBrackett & Ellis, P.C.100 Main StreetFort Worth, Texas [email protected]
