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PROPERLY CLASSIFYING WORKERS:
EMPLOYEE VS. INDEPENDENT CONTRACTOR

An important and often overlooked task for employers is to properly determine whether an employee should be classified as an employee or an independent contractor.  The classification can, among other things, impact the liability of the employer to an injured third party and create different responsibilities for the employer under the federal tax code.  For example, employers generally do not have to withhold or pay any federal taxes on payments to independent contractors.    

For tax purposes, an “employee” is “a person who works in the service of another person under an express or implied contract of hire, under which the employer has the right to control the details of work performance.”  An “independent contractor” is a person “who is entrusted to undertake a specific project but who is left free to do the assigned work and to choose the method for accomplishing it.”  While the definitions may seem to be fairly straightforward, in reality, determining the proper classification of a worker is much more complex.  The chart and information below utilizes the above definition and outlines the factors to be considered in making this determination. 

Indiana Supreme Court.

The Indiana Supreme Court analyzes ten factors to determine whether a person is an employee or independent contractor.  Although the leading factor is the employer’s control over the person, all factors are considered.  The following chart summarizes these factors. 

FACTOR

EMPLOYEE

INDEPENDENT CONTRACTOR

 

Control over the person

(Most important).

Subject to employer’s business instructions about when, where, and how to work. 

 

Answerable for results, not the particulars of how results are accomplished. 

Distinct occupation or business.

 

Does not operate a separate business, but works for employer.

 

Likely operates own business.

Type of occupation.

 

Employer supervises and directs work.

 

Unsupervised specialists.

Skill Required.

 

No particular special set of skills that are any different from other employees.

 

Typically, a special skill is required for job.

Supply of tools, instrumentalities, and place to work.

Employer provides tools or instrumentalities.

Individual provides his/her own tools or instrumentalities.

Length of employment.

 

Long-term relationships with continuous, regular hours.

Potentially short-term relationships, interrupted service, and/or work on a project basis.

 

Method of payment.

 

Payment by hour or month.

 

Payment by job/project.

Part of regular business of employer.

 

Services performed are part of employer’s business operations.

Services performed are not necessarily part of nor vital to normal business operations.

 

Belief of the parties.

 

Parties believe that individual is an employee.

Parties believe that individual is an independent contractor.

 

Whether the principal (employer) is in business.

 

Employer is in business.

Employer not necessarily in business and may be an individual.

 

Internal Revenue Service.

The IRS has issued guidance to assist in determining whether an individual is an employee or independent contractor.  (Employers Supplemental Tax Guide 2015, See Pages 7 to 10).  The analysis is broken into three categories, including: behavioral control, financial control, and the type of relationship between the parties.  There is a significant amount of overlap between the Indiana Supreme Court analysis set forth above and the IRS guidance.  In addition, the Employer’s Supplemental Tax Guide (http://www.irs.gov/pub/irs-pdf/p15a.pdf) provides specific examples to help employers properly classify employees. 

Note that this post is only a brief summary of the employee/independent contractor analysis.  It does not constitute legal advice nor does it establish an attorney/client relationship.  Should you have specific questions regarding the above or employment law in general, please contact Bonnie Coleman or Preston Sisler at Hodges and Davis.

Hodges and Davis, P.C. - May 2015