How Employers Should Make the Determination - Research Paper Example

?Business Law Independent Contractor or Employee? How employers should make the determination? What are some of the issues or recent cases? Introduction “How can an employer make those who work for him independent contractors rather than employees?” This is a challenging question asked by many small business owners and large firm owners as well. Business owners understand that if they classify their employees as independent contractors it will help them make significant savings for their business. Having independent contractors makes the business owners to avoid paying some accounting burdens such as overtime charges, workers compensations, health insurance costs, pension plans, and other employee benefits i.e. off duties, time rest periods like lunch breaks, and meals allowances. The business is also able to avoid such employees cost fulfilling business laws and regulations and the necessary charges. However, many workers may also decide to independent contractors in order to reduce expenses that employees face such as individual income tax return. Given all these benefits of classifying employees as independent contractors, what is the reason why employers would not treat his workers as independent employers? This is may be because of the consequences that may result if the Internal Revenue Service or even court finds out that a certain worker is an employee rather than independent contractor (Berson 50). If IRS gets an employer in such situation, the employer will pay full amounts for FICA portion, unemployment taxes, and compensation to the employee during the period in question. Additionally, all involved business directors and officers will be required to pay a penalty of 100% for the compensation of all withholding taxes, which are not paid. Following the recent introduction of the Employee Misclassification Prevention Law, and the preferred increment of $25 million dollars in 2014 federal budget for the labor department, employers can be sure of increased inspection by the government on classification of workers (Emerson 254). The Internal Revenue Services has also made announcement of inspecting over 6,000 businesses in the next three years in the firms, which are believed to have high rate of workers misclassification. Those employers who will be guilty will be forced to pay the set penalties. Although the mentioned industries by the Internal Revenue Service does not include, insurance, those employers found to use reasonable number of independent contractors will be a highly targeted. This will happen to be a great loss to such employers because of the penalties payments. In addition to such tax consequences due to worker misclassification as an independent contractor, if the law court was to make such determinations of whether a particular worker is not an independent contractor, the business owners will be subject to pay the claims that the worker could get. Such claims include; health allowances, retirement pension, and other employees’ fringe of benefits. The business will have to pay these benefits out of its own revenues. For instance, if such a worker was injured while working in business, the business will be liable to pay compensations to that particular worker and other benefits that the worker would have received from insurance if he had been a member of worker’s compensation insurance. The business may also be subject to suffering, pain, punitive, and pay penalties for failing to register its workers with the worker’s compensation insurance coverage. Therefore, it is now easy to understand why an employer must be keen when making decisions on whether to classify a particular worker as employee or independent contractor. An error in classifying a certain worker as an independent contractor, instead of employee may be very expensive to both the business and the owner. Generally, business owners should use the “common law” definition of employment to determine whether to classify a worker as either independent contractor or employee. According to the common law, employer-employee relationship exists when the business owner has the right to control his workers’ performance on the employer’s behalf. A worker is characterized as an independent contractor if the employer is only interested with the outcomes of workers services and has limited or no control over time, place, and manner on how these results are realized. For example, if someone hires somebody to replace or repair his roof and the homeowner only involves himself in inspecting the roof after completion of the work, such worker can be independent contractor. In contrast, if the homeowner hires a group of worker, buys the roofing materials, and is present to direct and supervise their worker, the group is termed as the homeowner’s employees. Many employment situations fall under the two explained examples. To enhance the “common law” definition of employment, the Internal Revenue Services has come up with documented guidelines to help employees make determinations on whether to classify a particular worker as either an independent contractor or employee. These guidelines center three main parts: Financial Control, Behavioral Control, and structure of the Relationship. The following are the key factors, which IRS uses to evaluate these main areas (Crawford 60). However, it is important to note that, classification of a particular worker as an independent contractor or employee depends on the worker’s employment relationship with the business, apart from the laid agreements between the business owner and the worker. This implies the court and Internal Revenue Services can disagree with such written agreements if the actual conditions of employment correlation are not reliable with those agreements. Therefore, having a contract agreement document that shows that a particular worker is an independent contractor does not necessary mean that the Internal Revenue Services or the court will admit to that employment relationship characterization. The following discussion showing how the factors employed by Internal Revenue Services to decide the type of worker-business relationship considers the normal relationship between a manufacturer, property, and insurance agency. The discussion also shows why Internal Revenue Services classifies such relationships as employee/employer relationships in many situations. Behavioral Control Type of instructions given-The instructions, which the agency gives indicates the worker’s status. For instance, if the agency gives a certain producer instructions addressing how, where, and when the he is to work and colleagues to work with, this signifies employee status. Ordinarily, insurance agency gives these instructions to producers and avoids giving up its rights to do so. Degree of instructions- If the instructions the agency gives the producer about how, where, when and whom to work with are more detailed, this is an indication of employee status. The degree of instructions given to the producers varies with different agencies. However, the more detailed the instructions are the more the producer would be likely considered as an employee. Training- Furthermore, if the employer offers training to the worker, this would definitely indicate that the worker is an employee. If the training provided is long term, the Internal Revenue Services considers this as strong evidence that the producer is an employee (Fishman 17). A producer who lacks previous experience may require training from agency, which are helpful to producers who wish to expand from commercial to personal and vice versa. In many cases, agencies offer long-term training to their producers to enable them to maintain their knowledge and working skills. If the employer caters for the training’s expenses especially when outside providers conduct the training, this is similar as if the agency offers the training, especially in a situation where the agency selects the training providers himself. Evaluation System- If the employer has a protocol of examining and evaluating the performance of the producer especially how his producers carry out their job; this would definitely indicate that such workers are employees. However, if the agency is only interested with evaluating the results of his workers’ performance this shows that such workers are independent contractors (Fishman 225). For instance, many of today’s agencies are more concerned with the quantity of sales that producers make per day than how they perform to make such sales. For such producers, this would signify independent contractor status to them. Financial Control Method of payment- If a certain producer’s mode of payment is salary or fixed amounts or if the producer is paid under hourly, weekly, and monthly basis, that would simply signify employee status. In contrast, many workers’ payment is after the completion of their job or on commission, whereby these factors signify independent contractors’ status for such workers. Unreimbursed Expenses-If the employer caters for, business, traveling allowances, meals allowances, and other employee expenses, this would signify employee status. This factor is becoming a subject to a wide range of variation with many workers and therefore the employer-employee relationship could change to require workers to cater for their own personal and business costs in many situations. Significant Investment- If the employer offers business facilities like; office, office stationeries, and other equipments for the producer to use while doing the job, this would imply employee status. Many employers offer offices, stationeries, and other equipments to their producers. However, restructuring the employment relationship would be important to require producers work out of offices especially at their home or other locations apart from agency offices. The negative effect of such approach would be the requirement of the worker setting, running, and maintaining such offices. Opportunity for Profit or Loss- If a worker’s performance does not have any risk of economic loss for the employer, such producers is an employee. A worker that has compensations against commissions, or was supposed to cater for business expenses referred above would be subject to such loss risks (Fishman 20). However, if such employment relationship agreements were to be into practice, they would depend on point-by-point evaluation of the workers financial status and his success prospects. Services Available to the Market- If a producer makes advertisements about his services to the public; such a producer would be independent contractor. Nevertheless, if a producer offers, his services to only one agency and cannot make his services available to the public or any other agency, and cannot work elsewhere without the employer’s permission; this indicates that the producer is an employee. This always the case with many agencies and is quite impossible to change. Structure of Relationship Written Contracts- Although a certain producer may have written contract that indicates that he or she is an independent contractor, this does not necessary control the final decisions to determine whether he or she is an independent contractor or an employee. The status determination will depend on the employment relationship between the agency and the producer in respect of all factors discussed in this paper (Fishman 22). Benefits- If the employer provides the producer with any kind of insurance coverage (life, health, disability, E&O), retirement pension plans, house, meals or travelling allowances, or any other worker’s fringe benefits, this signifies employee status. This is different with many agencies, but the more a producer pays such benefits, the more he or she is determined as independent contractor. Services Provided as Key Activity of Business- If the producer plays the role of the normal business operations, the services that the business depends on for its success or make large profits, such a worker is an employee. In most cases, producers are key factors to the success of the agency. Absence of such producers would pose risks of economical and financial loss in the business. Permanency of the Relationship- If the employment relationship existing between the worker and employer is a long-term one or has lasted for a long period, this signifies employee status. Many producers work continuously and over a long period at a good will basis to their agencies whereby, this behavior will be difficult to change. Conclusion To sum up, many employers tend to classify their workers as independent contractors even if the workers fall under employee category. Such classification helps employers to avoid incurring extra expenses like paying insurance coverage and allowances to the employees. In such situations, workers suffer a lot. Internal Insurance Revenue and courts should intervene in order to help workers enjoy their benefits. Employers who intentionally make such mistakes should be exposed to serious judgments and appropriate penalties. By doing that, workers misclassification will be a theme of past and workers will be able to enjoy their employment benefits. Work cited Berson, Susan A. Federal Tax Litigation. New York: Law Journal Press, 2001. Print This article is about Federal Tax Litigation. It gives out the taxation penalties employers should incur if they fail to pay FICA and FUTA taxes. The source is relates to this assignment because it outlines the factors which determine worker status. Bovard, James. Lost Rights: The Destruction of American Liberty. New York: St. Martin's Griffin, 1995. Print. Lost Rights: The Destruction of American Liberty shows how the State has become a juggernaut that threatens to destroy workers’ rights. The author reveals how bureaucrats use their power to trample on citizens constitutional rights. This article is relevant to this assignment because it explains the rights of workers, which employees should adhere to. Crawford, Tad. Business and Legal Forms for Photographers. New York: Allworth, 2002. Print. This latest edition attributes to the new Forms for employment and lease agreements. It gives out revised examples of letter of interest, estimate for client, schedule report, and preliminary budget. This source is significant to this paper as it outlines the purposes of a contract agreement with an independent contractor. Emerson, Robert W. Business Law. Hauppauge, N.Y: Barron's Educational Series, 2009. Print. The main contribution of this source is about origin and nature of business law. The explains the employment law. This book is relevant to this assignment since it covers all the employment laws such as Health and safety legislation, income protection, protection against discrimination, and fair labor standards act. Fishman, Stephen. Consultant & Independent Contractor Agreements. Berkeley, Calif: Nolo, 2011. Print. This edition is updated to reflect current employment laws and regulations. This source is relevant to this assignment since it analyses the benefits and drawbacks of using independent contractors and the benefits and drawbacks of either working as an independent contractor or employer. It also outlines the agreements to be enforced to address employees’ and independent contractors’ rights. Read More