ARE YOUR EMPLOYEES PROPERLY CLASSIFIED?

The most basic, and yet sometimes most important, question when bringing on workers is whether the worker will be classified as an employee or an independent contractor. Unfortunately, the answer is anything but simple because it depends. It is not only a question of what the worker’s particular factual scenario is, but also who is asking the question. An individual may be an employee under one test of a governmental agency or federal or state law, but an independent contractor under another. Similarly, the answer varies from state to state.

Looking at the two most frequently examined tests may help you determine if your employees are properly classified. However, this article is by no means the magic answer (if it were that simple, we’d be out of a job). Rather, employers should use this more for awareness and issue spotting than a guide as they attempt to navigate this uncertain landscape. Please remember that a true determination of your worker’s classification requires a deep look into your business and your worker’s role and relationship with your business.

Department of Labor

The Department of Labor’s employee v. independent contractor test grew from the Fair Labor Standards Act (FLSA). North Carolina’s Wage and Hour Act was modeled after the FLSA, so the FLSA’s test can be helpful in that arena as well. The FLSA’s test focuses on the “economic realities” of the relationship between the worker and employer – not what is written down on paper, but what is really happening. Here are some questions an employer may ask themselves when determining the classification of their employees under the FLSA or NCWHA:

Am I exercising substantial control over my workers?

• Does the worker have a low risk of loss and a lesser opportunity to make a
  profit?
• Am I supplying my workers with the equipment they need to perform their
  job?
• Does the worker require significant training and skill to perform the work?
• Is the relationship ongoing and indefinite?
• Are the services the worker performs a key part of my business?

Answering mostly yes to these questions may indicate that your worker is an employee and
not an independent contractor.

Internal Revenue Service

The IRS looks at 11 factors (reduced from the 20 it previously assessed) within three categories to make its determination: behavioral, financial, and type of relationship. Businesses should weigh all the factors when determining their status; there is no set number of satisfied or unsatisfied factors that makes a worker an employee or independent contractor.

• Behavioral: Does the employer have control or have the right to control what the worker does and how the worker performs their job?
  • This category focuses on the type of instructions the employer gives the worker, the evaluation of the work performed, and how much training is received. More detailed instructions on when and how to perform work, evaluations measuring the detail of the work performed, and periodic or ongoing training may be indicative of an employer/employee relationship.
• Financial: Are the business aspects of the worker’s job controlled by the employer?
  • Under this category, the IRS assesses how the worker is paid, whether they are reimbursed for expenses, who provides the equipment, the worker’s opportunity for profit or loss, and the method of payment. If the worker is required to bring their own equipment, runs the risk of incurring a loss, and is paid a flat fee for their services, the worker may look more like an independent contractor in this category.
• Type of Relationship: Are there written contracts or employee type benefits? Will the relationship continue and is the work performed a key aspect of the business?
  • The focus of this category is on whether there are written contracts, whether the worker is receiving employee–like benefits, the permanency of the relationship, and the services provided. If a worker receives benefits, plans to work indefinitely, and provides services that are a key aspect of the business, then the relationship may be leaning more towards that of an employer/employee.

As you may notice, regardless of who is asking the question, the inquiry is somewhat similar, and a common thread is: how much control the employer exercises over the worker. The more control the employer has over the manner in which the worker’s work is performed, the more likely the worker is to be an employee. The dangers of misclassification can be grave, ranging from liability for failure to withhold income taxes for employees to lawsuits over failure to pay wages or employee benefits. Recently, the DOL began funding state grants to improve data–sharing between states and the IRS to crack down on misclassification. Classifying employees can be confusing and difficult.