1099 Worker

What’s Your Classification?

Another update from the Jungle…..

At this time of year, as we all think about income taxes and payroll withholding, the perennial issue arises. When is a worker an employee (IRS Form W-2) and when is a worker an independent contractor (IRS Form 1099)?

For decades the answer was straightforward: look at “control”. When a company controls what, when, where and how a worker performs assigned tasks, the worker is an employee. By contrast, independent contractors are given a task and a deadline, and they control how, where, and when they complete the task.

Then life got complicated. In 2015 the Dept. of Labor (DOL) proposed raising the salary level of the overtime rule to $913 per week. Employees with weekly wages below that amount would be entitled to overtime pay if they worked more than 40 hours in a work week. It meant that more employees would be eligible for overtime pay.

At the same time, the DOL adopted the “economic reality” test. If the economic reality was that a worker was financially dependent on the company, then the worker was a W-2 employee. The practical effect of the test was to eliminate the classification of “independent contractor”.

To understand why the DOL took these actions, it helps to understand the philosophical approach of regulatory authorities. Regulatory authorities, including the IRS and DOL, recognize that someone will always find a way to game the system. (Remember the tax shelters that allowed some people to claim they had no taxable income?) So the regulators try to deter gaming by creating tediously detailed regulations that everyone complains are strangling businesses and the economy. (Of course, we eventually learn how to game new rules and complain when they change again.)

In 2015, the DOL wanted to deter perceived abuse of the “exempt” status in the overtime rule, and it wanted to ensure that more individuals would be covered by an employer’s group health plan as contemplated by the Affordable Care Act. To meet these objectives, the DOL proposed raising the salary limit and adopted the “economic reality” test.

The economic reality test was withdrawn, and we’re back where we started with the “control” test. The proposed overtime rule was also withdrawn, and the DOL is considering raising the salary limit but by a lesser amount.

However, it’s still critical to properly classify workers because the consequences of getting it wrong can be financially catastrophic. DOL civil penalties start at over $1,000 per employee per violation. The IRS can assess civil penalties and require a company to restate years of tax filings. Misclassified workers can sue for lost wages and benefits. It’s a triple whammy that few companies could financially survive.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

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I’m Independent Until I’m Not

Josh runs a localDriver1 courier service. He decides which jobs to accept and negotiates delivery fees with customers. When a customer calls, Josh looks at the roster of drivers and goes down the list until he finds a driver to handle the job.

His couriers are part-timers and include college students, stay at home moms, and a few Uber drivers. He treats everyone as an independent contractor because they use their own vehicles and set their own hours. All Josh requires is a clean driving record and proof of insurance.

Driver3Yesterday, Ron, a college student driver, was involved in a fender bender while making a delivery.  Ron is desperate to avoid telling his parents about the car. His parents bought the car for him as a reward for dropping his beer and pizza plan for college studies and getting serious about graduating.

Ron asks Josh to help pay for the repairs but Josh declines. He points out that Ron is an independent contractor, not an employee. Josh adds that it’s not his fault Ron was talking on his cell phone while driving and not paying attention to the traffic signals.

So Ron calls his mom to give her a hint that the car insurance premium may, possibly, kind of, increase due to unforeseen circumstances.  Like any experienced mother, Ron’s mom gets the real story within minutes. After she finishes explaining that idiots who can’t multitask shouldn’t try to drive and talk at the same time, she asks for more details about Josh’s courier business.

Driver2Ron’s mom works in HR for a major corporation and she’s just read about the U.S. Department of Labor’s new “economic realities” test. She thinks that Ron is actually an employee and not an independent contractor.

What should Ron’s mom do next?

  1. She can use her HR experience to compare Ron’s description of how the courier business is run to the DOL test and assess whether he’s an employee.
  2. She can ask one of the corporate attorneys at her company to give her an off-the-record assessment of the DOL test.
  3. She can contact Josh directly to argue that he should pay for the auto repairs because she believes her son is actually an employee of Josh’s business.

DOL released guidance on their new “economic realities” test about a year ago. This new test looks at whether a worker is economically dependent on the “employer”.  If yes, then the worker is an employee under the Fair Labor Standards Act (FLSA). Expect to hear much more about this test.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

Join the HR Compliance Jungle today. Click here!

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I’m Not His Employee

Another update from the Jungle….
image011Addison works for Rob, who has a consulting business. (We met Rob in last week’s post.) The work is sporadic and project-based but she likes it that way because she’s a free spirit. Addison worked for large corporations for many years and is happy to be on her own now.

She does project-based work for several businesses, including Rob’s, and also has a few clients of her own. She dislikes sales and prospecting for clients because she prefers to focus on the work. She likes working for Rob because he pays quickly and the projects allow her plenty of scope for imagination.

Today when she stopped by Rob’s office to discuss the next project, she found him in a strange mood and slightly hung over from overindulging in Gentleman Jack. Rob began talking about financial problems. At first Addison thought he was telling her that he was insolvent. Then she realized he was talking about some new policy of the U.S. Department of Labor (DOL).
image015The DOL recently said that it would no longer use the “control” test to determine if a worker is an independent contractor (1099 worker) or an employee (W-2 worker). Instead, the DOL plans to use an “economic reality” test. This new test has a number of factors but can be summed up by saying that if a worker is economically dependent on the employer, then the worker is a W-2 and not a 1099.

Addison accepts Rob’s offer of a shot of Gentleman Jack, although she prefers Buffalo Trace, and they sit in a gloomy silence as they contemplate what the new test means for each of them. Addison dreads the idea that she could again be classified as a W-2 because she likes being free to work at her pace and only on things she enjoys doing.

What should Addison do next?

  1. She can explain to Rob that she has other clients in addition to the work she does for him and so she thinks that she truly is an independent contractor.
  2. She can incorporate her business now that she has the money to do so rather than continuing to operate as a d/b/a. Incorporating is additional proof that she is running her own business.
  3. She can wait to make any changes until she has more information.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

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She’s Not My Employee

Another update from the Jungle….
image008Rob has a small consulting business that does project-based work. That means Rob needs a flexible work force that can easily gear up when there are lots of clients, but can also gear down when projects are few.

Rob relies on a group of individuals that he classifies as independent contractors. For each project, Rob explains what the client wants, the deadlines that must be met, and the scope of work. The worker can accept or reject any project. Rob’s been happy with his flexible work force.

At a recent networking event, Rob heard that the U.S. Department of Labor (DOL) has decided to ditch its old “control” test for deciding if a worker is an independent contractor (1099) or an employee (W-2). Instead the DOL will use an “economic reality” test. Rob does some quick research at www.dol.gov/whd and finds the document outlining this new test. What he reads makes him reach for a bottle of Gentleman Jack.

After a couple of stiff drinks, Rob thinks he understands the main points of this new test. The
image010economic reality test says that a worker who is economically dependent on an employer is an employee and not an independent contractor. Rob doesn’t know if his workers are economically dependent on him. He uses them part-time and always believed that they did work for other consulting businesses.

Rob sees that the new test has several factors. The factor that most worries Rob is the one that says if the work performed is an integral part of the employer’s business, then the worker is a W-2 and not a 1099 worker. Rob knows that his consulting business depends on completing projects for his clients which requires the use of skills that his independent contractors have.

After another shot of Gentleman Jack, Rob does some worst case scenario calculations of what will happen if his workers must be converted to W-2’s. He realizes immediately that it wouldn’t be financially possible to convert all of them to employees.

What are Rob’s options?

  1. He can choose a couple of the independent contractors that have the broadest range of skills and offer to convert them to W-2’s who work full-time for him. All the other workers would no longer be eligible to work on his company’s projects.
  2. He can talk to his CPA about cash flow and tax strategies for dealing with the new economic reality test.
  3. He can continue business as usual, including drinking more Gentleman Jack, while he waits to see what DOL will do.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

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Ignorance May Not Be Bliss

Another update from the Jungle…
image012Bill runs a small tech company with a group of bright, energetic young web designers. (His techies shouldn’t be confused with Trekkies, although many of them are Star Trek and Star Wars fans.) Bill’s techies provide their own laptops, iPads and cell phones. Some of the techies have other clients but most of them work exclusively for Bill.

Bill rents space in a renovated factory where he can meet with clients and with his techies to discuss projects. His clients think the location is cool because it’s a center for several IT startups.  His techies like it because next door is a coffee shop with plenty of dark roast coffee, a necessary ingredient in the creative process of the techies.

Bill insists that his techies work at his office location at least once a week so that he can monitor progress on specific client projects. Bill has always treated his techies as independent contractors rather than W-2 employees. The techies prefer to be paid as 1099’s because it gives them a sense of freedom as they work on their own schedule.

Recently, one of the techies told Bill that the U.S. Department of Labor (DOL) has redefined who is an independent contractor.  Based on this new definition all the techies should probably be reclassified as employees rather than independent contractors. But this techie is a bit of a weirdo who shows up occasionally dressed like Spock and tells clients to “live long and prosper” so Bill’s not sure he believes him.

What are Bill’s options?

  1. He can continue his existing practice of classifying the techies as independent contractors since this classification has not been challenged in the past.
  2. He can take a quick look at the DOL website to see if he can find information about a new definition of “independent contractor”.
  3. He can ask for professional help in figuring out whether his techies are truly independent contractors or are actually employees.

A few years ago, a client faced this issue and chose to continue classifying its web designers as independent contractors. The client also declined to hire an attorney to obtain a legal opinion on the matter. Ignorance may not bliss. It generally costs less to hire an employment law attorney to provide a legal opinion on the issue than wing it and end up paying penalties if the IRS or DOL decides workers were misclassified.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

Download my FREE eBook today! Click here!

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Classifying An Evolving Workforce.

Another update from the HR jungle…
image010Tom owns a construction business doing renovations and remodels. In the early days he classified all his workers as independent contractors. All the workers had years of experience, brought their own tools and Tom mostly just matched a worker with a homeowner. The worker did the job and Tom billed the homeowner.

As the years have gone by and his revenue has increased, Tom rented warehouse space with an office and storage space for equipment and supplies. The business now owns most of the tools and equipment used on the job, some of it donated by older workers who retired.

Tom also switched from experienced workers (too many retired on him) to hiring inexperienced workers. He pairs the young workers with an experienced older worker for training purposes. The younger workers generally use the tools and equipment owned by the business. All this means is that Tom is beginning to wonder if his old independent contractor classification still fits his workforce.

What are Tom’s options?

  1. He can continue classifying his workers as independent contractors and hope for the best.
  2. He can hire an HR consultant to help him do some general review of the IRS and DOL criteria for differentiating independent contractors (1099’s) from employees (W-2’s). Sometimes the facts make it obvious which classification applies.
  3. He can retain an employment law attorney to provide a legal opinion on whether his workforce consists of 1099’s or W-2’s if the facts are unclear and he wants added assurance of his legal obligations.

The above scenario is a composite of several actual situations faced by prospective and actual clients. In those situations, the prospective client chose the first option and the clients chose the second option. I recommended that one of the clients move directly to the third option and they retained an attorney. If your company is struggling with this issue, Corporate Compliance Risk Advisor may be able to help.

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