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Heightened IRS Scrutiny on Worker Misclassification and Tax Compliance P i f F d l d St t I f ti Sh iPreparing for Federal and State Information Sharing;Evaluating Risks and Benefits of the New IRS Compliance Program

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, DECEMBER 1, 2011

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Bob Adams Managing Director Tax Services RSM McGladrey Washington D CBob Adams, Managing Director, Tax Services, RSM McGladrey, Washington, D.C.

Stephen Ashby, Accounting and Auditing Manager, Billups Company CPAs Inc., Clackamas, Ore.

Michael Gall, Baker Hostetler, Cleveland, Ohio

Wray Rives, Owner, RivesCPA, PLLC, Coppell, Texas

For this program, attendees must listen to the audio over the telephone.

Wray Rives, Owner, RivesCPA, PLLC, Coppell, Texas

Tim Ellenwood, Director of Employment Tax, RSM McGladrey, Vienna, Va.

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Heightened IRS Scrutiny on Worker Mi l ifi ti d T C li Misclassification and Tax Compliance Seminar

Wray Rives RivesCPA PLLC

Dec. 1, 2011

Stephen Ashby Billups Company CPAs Inc Wray Rives, RivesCPA, [email protected]

Bob Adams, RSM McGladrey

Stephen Ashby, Billups Company CPAs [email protected]

Tim Ellenwood, RSM McGladrey [email protected]@mcgladrey.com

Michael K. Gall, Baker Hostetlermgall@bakerlaw [email protected]

Today’s Program

Review Of Federal, State Worker Classification Tests[Stephen Ashby]

Slide 7 – Slide 18

Ongoing IRS Research Project On Employment Taxes[Wray Rives]

IRS Labor Department Memorandum Of Understanding


Slide 23 Slide 27IRS-Labor Department Memorandum Of Understanding[Tim Ellenwood]

IRS Voluntary Classification Settlement Program Slide 28 – Slide 47


[Wray Rives and Bob Adams]

Best Practices For Determining Worker Status[Michael K. Gall]

Slide 48 – Slide 69[ ]

REVIEW OF FEDERAL STATE Stephen Ashby, Billups Company CPAs Inc.

REVIEW OF FEDERAL, STATE WORKER CLASSIFICATION TESTS

Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:A dA dAgendaAgenda

I t d ti Introduction

Common elements of the tests

Three approaches to independent contractor tests◦ Economic reality test◦ Economic reality test◦ IRS common law test◦ “ABC” test

The Billups Company CPA's Inc. Clackamas, Oregon 8

Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:I t d tiI t d tiIntroductionIntroduction

Milton Friedman and tax withholding

Stakeholders in the issue Stakeholders in the issue◦ Taxing authorities – federal and state◦ Department of Labor◦ Employers


Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:C El Of Th TC El Of Th TCommon Elements Of The TestsCommon Elements Of The Tests

Facts and circumstances are key

Operational control Operational control

Financial or business control

Nature of the business relationship


Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:E i R lit T tE i R lit T tEconomic Reality TestEconomic Reality Test

U.S. Supreme Court – U.S. v. Silk, 331 U.S. 704 (1947)

Issue Employer Social Security taxes Issue – Employer Social Security taxes

Five-part test


Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:E i R lit T t (C t )E i R lit T t (C t )Economic Reality Test (Cont.)Economic Reality Test (Cont.)

Fi t t t (C t ) Five-part test (Cont.)◦ Degree of control by employer◦ Extent of the relative investments by the parties.y◦ Degree to which the employee profit and loss are

determined by the employer.◦ The skill and initiative required for the jobThe skill and initiative required for the job◦ The permanency of the relationship


Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:“ABC” T t“ABC” T t“ABC” Test“ABC” Test

Used by about two-thirds of states in making determinations for state employment tax purposes

The general requirement is that the worker must meet three, (in some states, two) criteria to be considered independent.


Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:“ABC” T t (C t )“ABC” T t (C t )“ABC” Test (Cont.)“ABC” Test (Cont.)

Th t t t Three-part test◦ A= Alone: Does the individual work independently of the

employer’s control? ◦ B= Business: Does the individual maintain his own place of

business? ◦ C= Control: Does the individual practice or work at an p

established trade, and exercise control over his own schedule and method of operation?


Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:IRS C L T tIRS C L T tIRS Common Law TestIRS Common Law Test

T t i d f d t i i l ifi ti f f Test is used for determining classification, for purposes of federal employment taxes.

Based on common law, the economic reality test, the “ABC” test

IRS expands the list to 11, more detailed tests.


Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:IRS C L T t (C t )IRS C L T t (C t )IRS Common Law Test (Cont.)IRS Common Law Test (Cont.)

El t t t Eleven-part test◦ Behavioral control Degree of supervision Training

◦ Financial control Reimbursed business expensesReimbursed business expenses Worker’s investment in his business Availability to other employers

f Method of compensation Profit potential for the worker


Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:IRS C L T t (C t )IRS C L T t (C t )IRS Common Law Test (Cont.)IRS Common Law Test (Cont.)

El t t t (C t ) Eleven-part test (Cont.)◦ Business relationship Written contracts Provision of benefits Permanency of the relationship Importance of the worker’s services to the companyImportance of the worker s services to the company


Employee Vs. Contractor Classification:Employee Vs. Contractor Classification:R With M I f tiR With M I f tiResources With More InformationResources With More Information

Department of Labor fact sheet on the Fair Labor Standards pAct and employment relationships: http://www.dol.gov/whd/regs/compliance/whdfs13.htm

Department of Labor Web site: http://www.dol.gov/whd/ Employer’s Supplemental Tax Guide Publication 15-A:

http://www.irs.gov/pub/irs-pdf/p15a.pdf IRS Web site: Independent contractor (self-employed) or

l ?employee? http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

United States v Silk 331 U S 704 (1947): United States v. Silk, 331 U.S. 704 (1947):http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=case&court=us&vol=331&page=704

Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042 (5th Cir. 1987), , ( )


ONGOING IRS RESEARCH Wray Rives, RivesCPA, PLLC

ONGOING IRS RESEARCH PROJECT ON EMPLOYMENT JTAXES

Employment Tax National Research Project

I. 2,000 audits each year for 2010, 2011 and 2012

A. “Random” selection

1 Geographic variety1. Geographic variety

2. Size variety

B. Includes government entities and non-profits

C. Review every line item in employment returns (1099s & W-2s)

II. Audit issues

A W k l ifi iA. Worker classification

B. Sect. 409A deferred compensation rules

1. Stock option plans, cash bonus plans, severance plans1. Stock option plans, cash bonus plans, severance plans

C. Fringe benefits, executive compensation, reimbursed expenses

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Employment Tax National Research Project (Cont.)

III. Secure statistically valid information to compute the “employment tax gap”

A $54 to $200 billion annuallyA. $54 to $200 billion annually

B. 7–10% of workers are IC; 30–60% are misclassified.

IV. Identify characteristics for future compliance efforts

A. 1988 Employment Tax Examination Program

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Employment Tax National Research Project (Cont.)

V. Expectations

A. 2007-2009 returns

B Li b li i f t d ti B. Line-by-line review of returns and supporting documents

C. 300 agents assignedg g

VI. Voluntary Compliance Settlement Program (VCSP)

A. Announced halfway through ET NRP

B. Not available to taxpayers under audit

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IRS LABOR DEPARTMENT Tim Ellenwood, RSM McGladrey

IRS‐LABOR DEPARTMENT MEMORANDUM OF UNDERSTANDING

M d Of U d diMemorandum Of Understanding

I. Memorandum of understanding (MOU)

A. Signed by IRS and Department of Labor (DOL) on Sept. 19, 2011

B. Purpose: Sharing of information and collaboration between IRS and DOL to reduce incidents of misclassification of employees as independent contractors.

C. Specific objectives include:

1. Expand the IRS-DOL partnership launched in the Questionable Employment Tax Practice program

2. Reduce the employment tax portion of the tax gap

3. Increase compliance with federal employment and unemployment tax requirements

4. Increase compliance with federal labor laws enforced by the DOLp y

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Memorandum Of Understanding (Cont.)

1. Reduce fraudulent filings

2. Reduce abusive employment/unemployment tax schemes

3 Reduce worker misclassification3. Reduce worker misclassification

4. Reduce questionable employment tax practices

5. Work together to create educational and outreach materials and guidance for employers and workers

A. Duties and responsibilities of the IRS-DOL team

1 Meet on a regular basis to discuss issues of concern review 1. Meet on a regular basis to discuss issues of concern, review MOU actions and make recommendations for improvement in partnership activites

2 The team will create processes with all stakeholders in 2. The team will create processes with all stakeholders in mind.

25

Memorandum Of Understanding (Cont.)

A. Duties and responsibilities of the DOL

1. Refer to the IRS, DOL Wage and Hour Division investigation information and other data that DOL believes may raise IRS employment tax compliance issues related to misclassification

2. Share DOL Wage and Hour Division training materials and opportunities with the IRS

3. Participate in joint outreach events with the IRS

B. Duties and responsibilities of the IRS

1. Evaluate and classify employment tax referrals provided by the DOL and conduct examinations to determine compliance with pemployment tax laws

2. Share employment tax referrals provided by the DOL with state and municipal taxing agencies that are authorized to receive tax return information under approved agreements with the IRS

26

Memorandum Of Understanding (Cont.)1. Provide annual reports to the DOL summarizing results achieved

by using DOL referrals

2. Share employment tax training materials and opportunities with the DOL

3. Participate in joint outreach events with the DOL

4. Annually provide DOL with aggregate data relating to trends in misclassification

5. Provide DOL with information (other than taxpayer return information) that may constitute evidence of a violation of any federal criminal law, not involving tax administration, that the , g ,DOL enforces

A. States signing MOU include Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington, , g

B. Hawaii, Illinois, Montana, New York also expected to sign MOU

27

W Ri Ri CPA PLLC

IRS VOLUNTARY

Wray Rives, RivesCPA, PLLCBob Adams, RSM McGladrey

IRS VOLUNTARY CLASSIFICATION SETTLEMENT PROGRAM

VCSP: Voluntary Classification Settlement Program

I. Recognizing the importance of voluntary compliance, the IRS’ goal is to narrow the tax gap by raising the voluntary compliance rate by 2.3 percentage points – from 83.7% in tax year 2001 to 86% by tax year 2009.

II. Based on the latest IRS estimates for FY 2001, a 2.3-percentage-point increase in voluntary compliance could have generated another $48.8 billion that year – significantly more than the $33.8 billion the IRS brought in directly y g y g ythrough all enforcement activities in 2001.

III. The IRS would need to increase direct enforcement revenue by 144% ($48.8 billion/$33.8 billion) to match gains from a mere 2.3-percentage-point increase in voluntary compliance. Thus, increasing voluntary compliance is the only practical way for the IRS to significantly reduce the tax gap.

IV. IRS Taxpayer Advocate Service 2010 Report to Congress

29

VCSP: Voluntary Classification Settlement Program (Cont.)

Voluntarily reclassify contractors as employees

The Voluntary Classification Settlement Program (VCSP) allows eligible taxpayers to voluntarily reclassify their workers for eligible taxpayers to voluntarily reclassify their workers, for

federal employment tax purposes, and to obtain relief similar to that obtained in the current classification settlement program.

IRS Announcement 2011-64

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I. Only applies to federal employment taxes

A O i f t t iA. Opening for state agencies

B. Specifically taxes under Sect. 3509(a)

II. Does not have to apply to all contractors

A. Must apply to all workers in the same classA. Must apply to all workers in the same class

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III Eli ibilitIII. Eligibility

A. Consistent past treatment

B All required 1099s filed for past three yearsB. All required 1099s filed for past three years

C. Not currently under audit by IRS, DOL or any state agency

D. No prior examination or in compliance with terms of prior audit

E. Non-profits and government agencies (except Sect. 218) eligible

F CSP (Classification Settlement Program) for ineligible F. CSP (Classification Settlement Program) for ineligible employers

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IV. Form 8952 Application for VCSP

A. Filed 60 days prior to change in classification

B. Must be signed by owner, general partner or corporate officer

C. Number of workers affected

D. Include Form 2848 POA, if applicable

V. Liability

A. Use Sect. 3509(a) tax rates

B. 10% of tax that would have been due for most recent complete tax year

C Two calculationsC. Two calculations

1. 10.68% of wages up to SS wage base (10.28% after 12/31/11)

2. Plus 3.24% of all wages above base

3 Pay 10% of the sum3. Pay 10% of the sum

33


VI. Results

A No additional interest and penalty liability for A. No additional interest and penalty liability for misclassification

B. No employment tax audit for prior years

C. Treat all future workers in affected classes as employees

D. Extend statute of limitations for each of the next D. Extend statute of limitations for each of the next three years, from three to six years

1. Applies to tax years beginning after the VCSP date

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VCSP: Possible Pitfalls And Risk Analysis

I. What if the IRS doesn’t accept the application?

A. You may reapply.

1 A li ti b j t d if f l th 1. An application may be rejected if, for example, the applicant has not filed all workers’ Forms 1099 or did not treat the class of workers consistently for the previous three years.

2. Have to wait until requirements are met to reapply

B You are potentially exposing yourself to an IRS audit B. You are potentially exposing yourself to an IRS audit, because they now know you may have misclassification risks in prior years.

35

VCSP: Possible Pitfalls And Risk Analysis (Cont.)

C. The fact that you may have misclassification risks in prior years may be shared with DOL or states, since they are all sharing information.

II. Is the extension of the statute of limitations to six years acceptable to the employer?

III. No alleviation of state taxes, penalties or interest?

IV. Questions about possible disclosure of submission made to IRS

A The VCSP closing agreement does not resolve potential A. The VCSP closing agreement does not resolve potential libaility arising from worker misclassification.

36


1. Federal and state “minimum wage” and “overtime laws”

2 State ”unemployment compensation” 2. State unemployment compensation

3. Laws pertaining to employee benefits under ERISA

B. DOL, or the employee, may come in seeking back wage-and-hour benefits (either minimum wage and/or overtime) against the employer This is after the employer overtime) against the employer. This is after the employer admits to the IRS that it has misclassified its employees as independent contractors.

37


C. The Office of Federal Contract Compliance Programs and the Occupational Safety and Health Administration will also be receiving and sharing this information.

D. There will be additional costs in future years for the workers covered under the VCSP

1. FICA, Medicare, FUTA and SUTA

2 Possible increase in workers’ wages due to reduction 2. Possible increase in workers’ wages due to reduction of take home pay, and/or

3. Loss of workers and expense of hiring new ones

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V. Is employer entitled to relief under Sect. 530 and the Classification Settlement Program (CSP)?

A Sect 530 of the Revenue Act of 1978 (Sect 530) as A. Sect. 530 of the Revenue Act of 1978 (Sect. 530) as amended and made permanent – not an IRC section

1. A safe harbor provision that prevents the IRS from retroactively reclassifying “independent contractors” as employees and subjecting the employer to federal employment taxes, penalties and interest for such misclassification. In order for an employer to qualify for Sect. 530 relief, it must have:

39


a. Consistently treated the workers (and similarly situated workers) as independent contractors

b Complied with the Form 1099 reporting b. Complied with the Form 1099 reporting requirements with respect to the compensation paid the workers for the tax years at issue, and

c. Had a reasonable basis for treating the workers as independent contractors.

2. Note similarity of Sect. 530 to VCSP, but for 2. Note similarity of Sect. 530 to VCSP, but for reasonable basis requirement

40


3. Reasonable basis

N d fi iti f “ bl b i ” f S t 530 a. No definition of “reasonable basis” for Sect. 530

b. To be liberally construed in favor of the taxpayer

c Four categories of authority can be relied on as c. Four categories of authority can be relied on as reasonable basis: (1) federal judicial precedents and administrative rulings, (2) a prior audit of the taxpayer (3) industry custom and (4) a catch all taxpayer, (3) industry custom, and (4) a catch-all “other” reasonable bases

41


B. CSP – Program developed in 1996 based on Sect. 530

1. Amount of relief provided to an employer under the CSP is based on its Sect 530 argument CSP is based on its Sect. 530 argument.

2. CSP settlements can be as good as tax for one year at IRC Sect. 3509 rates, if a business agrees to begin treating the workers in question as employees prospectively.

3. CSP can be found at:3. CSP can be found at:

http://www.irs.gov/irm/part4/irm_04-023-006.html#d0e10

42


C. Once a company reclassifies its independent contractors to employee status under the VCSP, the possibility of using a Sect. 530 and CSP settlement in the future is lost forever as to that category of independent contractor.

1. If employer could meet requirements of Sect. 530 and CSP are the benefits of VCSP worth giving up that and CSP, are the benefits of VCSP worth giving up that possibility?

2. If employer not sure all requirements of Sect. 530 and CSP could be met, does a taxpayer need protection under VCSP (i.e., assurance against back audits, and no interest or penalties)?

43

p )


D. Given the potential non-employment tax related issues listed previously that could arise from the VCSP program, giving up the Sect. 530 relief may not be worthwhile for every taxpayer.

VI. Impact on other areas of the law when reclassifying an employee for tax reasons

A. Federal and state labor laws?A. Federal and state labor laws?

B. Healthcare law?

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VII. Other considerations in risk analysis

A. VCSP payments to IRS – really a “toll charge”, or something else?something else?

1. Announcement 2011-64: “A taxpayer who participates in the VCSP will agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the taxpayer will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509 of the Internal Revenue Code …”

45


2. Deductibility by employer for all or part of the payment?

3 Creditability to worker’s benefit accounts for part of 3. Creditability to worker s benefit accounts for part of the payment?

B. Does the employer plan M&A activity that would be enhanced or damaged by entering VCSP?

1 Clean up old years and any FAS 5 liabilities to enhance 1. Clean up old years and any FAS 5 liabilities to enhance value; align with buyer’s classification system before sale

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2. Extend statutes, bind buyer/future employer, diminish value of business due to misalignment of buyer’s classification system?

C. Future rounds of VCSP – as was the case for Offshore Voluntary Disclosure Initiative?

1. Current VCSP: 10% of one year’s tax obligation? Will IRS terminate the program or add an end date?IRS terminate the program or add an end date?

2. Future VCSP: 20% of two years’ tax obligation with termination date?

47

3. After that – Back to common law?

BEST PRACTICES FOR Michael K. Gall, Baker & Hostetler LLP

BEST PRACTICES FOR DETERMINING WORKER STATUS

Best Practices For Determining Worker Status

I. Overview

A. Review of common law agency test applicable to federal employment taxes

B. Statutory and regulatory guidance

1. Statutory employees and non-employees

2. Highly-trained professionals (e.g., attorneys and physicians)g y p ( g , y p y )

C. IRS training materials

1. Breakdown of the common law agency test

B h i l t l fi i l t l d l ti hi f th a. Behavioral control, financial control and relationship of the parties

D. What (if anything) is within your power to direct the legal status of the worker relationship?worker relationship?

E. Different standards for other purposes (ADA, Title VII, ERISA)?

49

Best Practices For Determining Worker Status (Cont.)

I. Quick review of common law agency test applicable to federal employment taxes

A. The test (generally speaking) is whether the principal has the right to direct and control the manner in which the work is done, and not just the end result.

B. This common law agency test is explicitly adopted by the FICA g y p y p yand FUTA statutes. See IRC §§ 3121(d)(2) and 3306(i). While not adopted by the income tax withholding statute [see IRC §3401(c)], the regulations to this statute clearly adopt the common law agency test.

C. Treasury regulations adopt the “right to control” consideration as paramount in the analysis. See Treas. Reg. §§ 31.3121(d)-1(c); p y g §§ ( ) ( );31.3306(i)-1(b); and 31.3401(c)-1(b).

50


I. Regulatory guidelines for applying the common law test [see generally, Treas. Reg. §§31.3121(d)-1; 31.3306(i)-1; and 31.3401(c)-1]

A. Form (i.e., label as “independent contractor,” “partner,” etc.) does not t lcontrol

1. But, consider statutory employee/non-employee provisions discussed below

B. All classes or grades of employees are to be tested, including supervisors and managers.

C. The right to control is the paramount consideration, not the actual exercise of such rightexercise of such right.

D. Individuals such as attorneys, physicians, dentists, auctioneers and construction contractors engaged in the pursuit of an independent trade, business or profession in which they offer their services to the general business or profession in which they offer their services to the general public, are independent contractors.

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I. Corporate officers and statutory employees

A. Corporate officers are employees.

1 S ll l t ti f ffi h f 1. Small regulatory exception for officers who perform minor or no services and receive no remuneration and are entitled to none

2. Directors, acting in their capacity as such, are not employees.

B Special consideration for small organizations and B. Special consideration for small organizations, and particularly charities and other non-profits, who may not have an extensive leadership structure

52


I. Corporate officers and statutory employees (Cont.)

A. Certain drivers, fulltime insurance salesmen, home workers and salesmen are employees if:

1. The contract of service contemplates that the person performs substantially all of the services himself/herself.

2. The worker does not have a substantial investment in the facilities (other than transportation facilities) used in connection with the (other than transportation facilities) used in connection with the performance of services.

3. The services are part of a continuing relationship and not a single transaction.

B. The provisions for fulltime insurance salesmen and home workers do not apply for FUTA purposes, while none applies for income tax withholding purposes.

C. Any individual who performs services that are included under an agreement made pursuant to Sect. 218 of the Social Security Act is an employee for FICA purposes only.

53


I Statutory non-employees (for FICA FUTA and federal income I. Statutory non-employees (for FICA, FUTA and federal income tax withholding purposes)

A. Under IRC §3506, companion sitters are not employees of a referral service they utilize, if the referral service is paid on a fee basis.

B Under IRC §3508 licensed real estate agents and certain B. Under IRC §3508, licensed real estate agents and certain direct sellers are not employees if:

1. Substantially all of their compensation is paid on a commission (rather than hours worked) basis.

2. They have a written contract with their principal providing that they are not employees, for federal tax providing that they are not employees, for federal tax purposes.

54


I. IRS Form SS-8 (determination of worker status for purposes of federal employment taxes and income tax withholding)

A. Filing whereby the IRS will make a determination regarding the l t t t f k ( f k ) ll i th employment status of a worker (or group of workers), generally using the

common law test

B. May be filed by either the principal or the worker

C. Information to be provided comes in five categories:

1. General information (e.g., description of principal’s business)

2. Behavioral control (e.g., training required)

3. Financial control (e.g., expenses incurred by the worker)

4. Relationship of the worker and firm (e.g., worker benefits)

5 Information for service providers and salespersons only 5. Information for service providers and salespersons only

55


I. IRS Training Manual 3320-102 (October 1996)

A. This constitutes the most recent guidance to IRS field agents who are making determinations of worker status.

B. Notes that Rev. Rul. 87-41 is merely a collection of 20 important factors for applying the common law test

1. Therefore, it does not, necessarily, take precedence over the Training Manual.

2. Also notes that factors can, and do, change over time

a. Example: As the general public becomes more security conscious, it demands identification earlier and more often. Therefore, the fact that a worker must brandish a company logo early and often is less important of a consideration than in years past in years past.

b. Consider this factor in the post-9/11 world

56


I. IRS Training Manual 3320-102 (Cont.)

A. Guidelines for considering worker status and applying the common law testco o law test

1. Every piece of information that helps determine worker status is relevant.

2. But, the “relative importance” of an individual consideration can “vary significantly.”

3. Possibility of dual status (see Rev. Rul. 58-505, 1958-2 y ( ,C.B. 728)

4. Manual reminds agents (and taxpayers) that the IRS audit process is designed to select returns with a “high process is designed to select returns with a high probability of error.”

57


I IRS Training Manual 3320 102 (Cont )I. IRS Training Manual 3320-102 (Cont.)

A. Breaks down the common law test into three areas of consideration

1. Behavioral control

a. The right to direct how the worker performs the job

2. Financial control

a. The right to direct how the business aspects of the job are handled

b. Opportunity for profit or loss

3. Relationship of the parties

a. Factors indicating what the parties intend for their own g prelationship

B. Note the obvious tie-in to the Form SS-8, which further indicates the Training Manual’s importance

C. To the extent one area is inflexible, other areas take on greater importance (e.g., physicians).

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A. Behavioral control, such as control over:

1 Wh d h t d th k1. When and where to do the work

2. What tools or equipment to use

3 What workers to hire to assist3. What workers to hire to assist

4. Where to purchase supplies or services

5. Delegation of responsibilities among workers5. Delegation of responsibilities among workers

6. What routines or patterns must be used

7. What order or sequence to follow

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A. Behavioral control considerations

1. The degree of instruction is critical to the analysis, as are the 1. The degree of instruction is critical to the analysis, as are the repercussions to the worker (if any) for failing to follow them.

a. Differentiate instructions vs. suggestions

b What is included in any evaluation procedure?b. What is included in any evaluation procedure?

2. Government instructions vs. customer instructions

3. Are minimal instructions needed?

a. Right to control vs. exercise of right

4. Is significant training required?

a Distinguish between mandatory training and voluntary a. Distinguish between mandatory training, and voluntary training programs and general orientation

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I IRS Training Manual 3320-102 (Cont )I. IRS Training Manual 3320 102 (Cont.)

A. Financial control

1. Significant investment tends to indicate independent contractor statusstatus.

2. Unreimbursed expenses important, reimbursed expenses are not

3. Services available to the relevant market

a. Advertising

b. Maintaining a visible business location

4. Method of paymentp y

a. Salary and hourly compensation vs. flat fees vs. commissions

5. Opportunity for profit or loss

Thi i th t id ti d th fi t f f t a. This is the paramount consideration, and the first four factors all affect the opportunity for profit or loss.

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A. Relationship of the parties

1. Intent of the parties/written contract1. Intent of the parties/written contract

2. Forms W-2

3. Incorporation

4. Employee benefits

5. State law characterization

6. Discharge/termination rights or restrictions6. Discharge/termination rights or restrictions

7. Permanency of the relationship

8. Regular business activity

B. Best opportunity for “molding” the legal status, but other considerations are paramount if present and relevant

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A. Facts of lesser importance

1. Part-time vs. fulltime work1. Part time vs. fulltime work

2. Place of work

3. One location vs. many locations

4. Hours of work

B. Weighing the evidence under all three factors

1. “When you have explored the relevant evidence, you will 1. When you have explored the relevant evidence, you will probably find some facts that support independent contractor status and other facts that support employee status … You will, therefore, need to weigh the evidence before you in order to determine whether, looking at the relationship as a whole, evidence of control or autonomy predominates.”

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I. IRS Training Manual 3320-102 (Cont.)g ( )

A. Practical application of the above analysis to your company’s workers

1 Basic considerations1. Basic considerations

a. What titles do the parties use?

b. What terms/phrases does the written contract use, if any?

c. Does the worker operate under a separate trade name?

i. Does the worker advertise his/her services?

d Are Forms W-2 or 1099 issued?d. Are Forms W-2 or 1099 issued?

e. Is the worker included in company employee benefit programs?

f. Does the worker use subordinates that are not under your company’s control?

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A. Practical application of the above analysis to your company’s workers (Cont.)

1. Considerations requiring more careful analysisq g y

a. What written instructions are provided to the worker? From whom?

b To whom does the worker report?b. To whom does the worker report?

c. Is the worker subjected to regular performance reviews?

i. What is the subject of the review?

d. What are the termination procedures for the worker? Are there any restrictions or economic consequences?

e. Taking all factors into account, is it possible for the worker to ff i l th gh th l ti hi ?suffer an economic loss through the relationship?

f. What is the method for calculating compensation?

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I IRS Training Manual 3320-102 (Cont )I. IRS Training Manual 3320 102 (Cont.)

A. Practical application of the above analysis to your company’s workers (Cont.)

1. Less obvious considerations that are subject to control by the principal

a. Is the worker invited to company parties?

b. Is the worker listed in the company directory?

c. Does the worker have an office with a name plate?

d. Is the worker eligible for employee awards?

e. Does the worker have access to employee parking?

f Does the worker receive an employee handbook with f. Does the worker receive an employee handbook with company policies?

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I. Different standards for different purposes?

A. Three different legal tests have developed at the federal level for determining who is an “employee.”

1. Common law agency test

a. Whether the principal has the right to control the method by which the work is performed in addition to method by which the work is performed, in addition to the end result

2. Economic reality test

a. Whether the worker is economically dependent upon the business to which he/she renders the services

3. Hybrid testy

a. Combining characteristics of the other tests

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I Different standards for different purposes (Cont )I. Different standards for different purposes (Cont.)

A. Do the different tests yield different results?

1. The latter two are generally considered broader and so they will t k th f i f th l t tcapture some workers on the fringes of the common law test.

2. Certain federal statutes (because of their remedial nature) use the “economic reality test.”

a. Fair Labor Standards Act

b. Family and Medical Leave Act

c Equal Pay Actc. Equal Pay Act

d. Employee Polygraph Protection Act

3. Note, however, that other remedial statutes (e.g., Title VII and th A Di i i ti i E l t A t) tl th the Age Discrimination in Employment Act) currently use the common law agency test.

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I. Summary of procedures for determining and analyzing worker status

A. Statutory/regulatory employee? For what purpose?

B Statutory non-employee? B. Statutory non employee?

C. Is Form SS-8 worthwhile?

D. Can a determination be made under the IRS Training Manual?

1. Keep in mind regulatory guidelines

E. Can the relationship be molded to create certainty?

1 Cl d “ l i hi f h i ”1. Close cases and “relationship of the parties”

F. What is the impact on other areas of law?

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