UPDATE – Are You Misclassifying Your Workers?
Hiring employees costs money, not only in the amount you’re paying them but also in taxes, fees, and time spent filling out the paperwork for the relevant government agencies. Because of those headaches, it’s incredibly tempting to begin hiring workers as independent contractors. If you are misclassifying your workers, you risk an audit by the IRS and your state unemployment agencies. I’ve already discussed the factors considered by the IRS, but after helping a client through an audit by Nevada’s DETR (Department of Employment, Training and Rehabilitation), I thought I’d discuss their factors.
Wait just a minute…recent legislation has turned the old DETR analysis on its ear. How does the new language compare to the old?
Previously, in order to properly classify a worker as an independent contractor, all three of the following had to be true; fail one, fail all and the worker must be classified as an employee:
1. The person has been and will continue to be free from control or direction over the performance of the services, both under his contract of service and in fact; AND
2. The service is either outside the usual course of the business for which the service is performed or that the service is performed outside of all the places of business of the enterprise for which the service is performed; AND
3. The service is performed in the course of an independently established trade, occupation, profession or business in which the person is customarily engaged, of the same nature as that involved in the contract of service.
Number 2 always seemed to trip up our clients.
Today, the analysis looks very different. Rather than assuming all workers are employees and making the employer fight for an independent contractor classification, now the worker is presumed to be an independent contractor:
- If he/she has a social security or EIN or has filed an income tax return showing income from a business in the previous year;
- He/she is required by the employer to maintain his or her own business licensing; and
- He/she satisfies three of the following:
- Has control over the means and manner of the performance of the work and the result is the primary element bargained for in the contract;
- The person has control over the time during which the work is performed (with a few exceptions regarding hours);
- The person is not required to only work for one company;
- The person can hire employees to help;
- The person contributes money to get his/her business going (tools, a commercial lease, etc).
As you can see, it then becomes much easier to properly classify a worker as an independent contractor. However, the legislature didn’t stop there. A one-liner in the statute drives home the point: “The fact that a person is not conclusively presumed to be an independent contractor for failure to satisfy three or more of the criteria set forth in paragraph (c) of subsection 1 does not automatically create the presumption that the person is an employee.”
All that said, it’s still important to put the terms of the working relationship in writing, ensure the independent contractor supplies you with proof of insurance and licensure.