Employee or Independent Contractor?

Are the people working in your business “employees” or “independent contractors”? Correctly classifying workers is important because misclassification can be costly. The Department of Labor seeks to protect “employees” who are entitled to minimum wage or overtime earnings under the Fair Labor Standards Act and employers can be held liable for the payment of such wages if an “independent contractor” is found to actually be an employee.  Similarly, the Internal Revenue Service wants to see taxes are properly withheld and paid and can seek recovery of taxes, interest and penalties from employers who fail to withhold and pay employment taxes relating to compensation to employees misclassified as independent contractors.

Both the DOL and IRS have published guidance in determining whether a worker is an employee or an independent contractor. The IRS has established a “20 Factor Test”, where each factor is intended to be evaluated by a “Yes” or “No” answer. These factors are reflected on IRS Form SS-8, which either a worker or an employer can submit for purposes of obtaining a determination of the correct classification.

The DOL’s 2024 rule regarding employee/independent contractor determination sets forth six factors, some of which could prove to be somewhat subjective (“worker’s skill and initiative”, for example), but none of them alone carry dispositive weight. A commonality of the IRS and DOL factors is that they are directed at determining whether the worker is truly independent in providing services.