Independent Contractor or Employee? It’s Not Always Clear.

The question of whether to treat a worker as an independent contractor or employee is an age-old question that has plagued many an entrepreneur. The classification affects how much you, as a business owner, pay in taxes, whether you need to withhold from your workers’ paychecks, and what tax documents you need to file. The consequences of misclassifying can include debilitating tax liabilities and failure-to-pay and failure-to file penalties. There are many examples of “successful” businesses that ran into problems or even were forced out of business entirely because it was determined that they had misclassified individuals (even exotic dancers) as independent contractors.
  
But how do you know when a worker crosses the line from independent contractor to employee? The IRS generally uses a three-factor test: Behavioral control (i.e., whether your control how the work is done), financial control (i.e., whether you direct or control the financial aspects of a worker’s job), and type of relationship (i.e., how the workers and business owner perceive their relationship). Not surprisingly, however, the application of these factors still leaves some businesses questioning their determinations.  And, when the decision-making is left to a court, the results are sometimes surprising.  This article written by Kevin McGowan and recently published on BNA does a good job of summarizing the findings of the U.S. Court of Appeals for the Sixth Circuit regarding the classification of an installer of satellite dishes, which was ultimately sent to a jury for resolution. Some of the relevant parts of the summary are:

A jury must decide if a technician who installs satellite dishes in Michigan for a satellite-internet-dish service firm is an employee entitled to overtime pay under the Fair Labor Standards Act or an independent contractor, a divided U.S. Court of Appeals for the Sixth Circuit ruled March 26.

In a 2-1 decision reversing summary judgment for Miri Microsystems LLC, the court said under a nonexclusive six-factor economic realities test, Michael Keller raised triable issues he was a Miri employee entitled to overtime pay. 

Miri, which provides satellite installation services in Michigan for HughesNet and iDirect, argued Keller was an independent contractor, who was paid flat fees for each installation and repair, remained free to work for other installation companies and controlled the number of days he worked and how many jobs he accepted. Keller's evidence indicated he worked six days a week from dawn until midnight.

The Sixth Circuit, however, said after reviewing the relevant factors—permanency of the relationship, degree of skill required, Keller's investment in the enterprise, his opportunity for profit and loss, Miri's right to control how work is performed and whether Keller's services were “integral” to Miri's business—disputed issues remain that require a jury's resolution.

In dissent, Judge Alan E. Norris agreed Sixth Circuit precedent supports use of the six-factor test for determining employee or independent contract status in FLSA cases. But he said he would affirm Keller was an independent contractor, given the absence of an employment contract with Miri, his ability concurrently to work for other companies and Keller's control over his own schedule.

Some business owners believe it’s always less risky to classify a worker as an employee, simply because the added compliance costs today outweigh the potential misclassification liabilities. Before making worker classification decisions, be sure to carefully review the existing guidance and consult with your professional advisors, who routinely counsel businesses of all sizes through such matters.