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<html> <head> <title>HRA - Publications "Independent Contractor or Employee?" Sample</title> <meta name="GENERATOR" content="Microsoft FrontPage 4.0"> <meta name="ProgId" content="FrontPage.Editor.Document"> </head> <body bgcolor="#FFFFFF"> <p align="center"><a href="http://www.consulthra.com/index.html"><img border="0" src="hralogo52001.jpg" width="470" height="144"></a> <h3><font face="Verdana, Arial, Helvetica, sans-serif">An excerpt from another Personnel Notebook, <em>"Independent Contractor or Employee? Who's In Control Here?"</em></font></h3> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">Many organizations and government agencies take a deep interest in the issue of independent contractors (ICs). Beyond unions and the National Labor Relations Board (NLRB), the Social Security Administration wants the FICA paid on employees, federal unemployment agents want to see the FUTA paid, and then there's Workers' Compensation and state unemployment compensation agencies who are also standing in that line.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">Although all these organizations have a stake in this issue, the real driver in all the current action is the Internal Revenue Service (IRS), and they are really cracking down!</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">The IRS has a legitimate concern. They know companies like Eastern don't have to pay federal taxes on ICs as they do on employees. They also know the taxes to be paid by the worker are not deducted from the earnings of ICs as they are with employees.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">The result is that the IRS estimates that it loses $3.7 billion annually resulting from workers' "misclassifications." In addition, ICs who would be expected to file their taxes as independent businesses often underpay or avoid payment altogether of their taxes and beyond that, many continue to pay taxes annually instead of quarterly as ICs are required to do.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">So in 1986, the IRS created the new Employment Tax Examination Program and targeted small businesses (of less than $3 million annual revenues) as the greatest violators. During the first year of operation, they ruled against 92% of all employers they examined on IC classifications. That program is still in full swing and has been gaining momentum.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1"><strong>WHY IS THIS SUCH A HOT ISSUE NOW?</strong></font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">There are many political opinions on this, however, basic demographic changes in the workforce certainly must be recognized as part of the problem.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">As downsizing, rightsizing, re-engineering organizations, and early retirement reduces the size of so many companies' workforce, the government is losing taxpayers and gaining tax users, (i.e., unemployment claims, welfare usage, etc.). However, many of those former employees are also becoming self-employed.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">The government, particularly the IRS, wants to reinterpret the regulations to bring more or most of the ICs back into the employee tax base. This could result in a total reinterpretation of what an employee is. But let us start by identifying what an IC is.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1"><strong>WHAT IS AN INDEPENDENT CONTRACTOR?</strong></font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">The most common myth on ICs today is that a company can cut out a segment of the work that they now hire employees to perform and contract it out to someone else. Often to the same workers who formerly performed the work. At its worst, the company calculates its total cost of wages, benefits, taxes and tools and then convinces an employee to start their own company to perform the work for about 80% of that predetermined cost. In many such cases the worker makes less than they made on wages and sometimes less than minimum wage. This is clearly not what employers in general nor the IRS wants.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">An independent contractor is basically one who operates their own company providing goods or services to clients for fees. However, that broad generic description is too easy to manipulate. Therefore, the IRS has attempted to create a standard. The standard is basically a judgment call often based on appearances, gut feelings and sometimes prejudice.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">The decisions made by the IRS depend primarily on whether the employer has the control over both what the worker does and how he/she does it. The greater the control seems to be, the more likely the worker will be classified as an employee.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">More specifically, the IRS uses the following 20 "Common Law" rules as their guidelines. The preponderance of "yes" answers on the more significant questions is used as evidence of an employer/employee relationship.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">1. Do you provide the worker with instructions on when, where and how work is performed?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">2. Did you train the worker in order to have the job performed correctly?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">3. Are the worker's services a vital part of your company's operations?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">4. Is the person prevented from delegating work to others?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">5. Is the worker prohibited from hiring, supervising and paying assistants?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">6. Does the worker perform services for you on a regular and continuous basis?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">7. Do you set the hours of service for the worker?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">8. Does the person work full time for your company?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">9. Does the worker perform duties on your company's premises?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">10. Do you control the order and sequence of the work performed?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">11. Do you require workers to submit oral or written reports?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">12. Do you pay the worker by the hour, week or month?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">13. Do you pay for the worker's business and travel expenses?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">14. Do you furnish tools or equipment for the worker?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">15. Does the worker lack a "significant investment" in tools, equipment and facilities?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">16. Is the worker insulated from suffering a loss as a result of the activities performed for your company?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">17. Does the worker perform services solely for your firm?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">18. Does the worker not make services available to the general public?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">19. Do you have the right to discharge the worker at will?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">20. Can the worker end the relationship without incurring any liability?</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">Based on IRS Revenue Ruling 87-41.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">Although much of this seems reasonable, like many federal laws it is too vague, too subjective, open to misinterpretation and the final decision is all too often politically or financially motivated. Companies clearly want something more concrete, simple and logical as a guideline for this enormously affecting decision.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1"><em>The balance of this issue will cover:</em></font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">How to appeal a decision by the IRS.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">5 things you can do now.</font> <p><font face="Verdana, Arial, Helvetica, sans-serif" size="-1">1997 update.</font> <hr width="25%" align="center" size="1"> </body> </html>