One of the Top Ten Great Urban Myths is that Albert Einstein failed math in school about which he replied:
I never failed in mathematics,” he replied. Before I was fifteen I had mastered differential and integral calculus.
The myth, however, still persists.
We have our own myths in the benefit world, or at least some employers do when it comes to who is and who isn’t an independent contractor. Here are just a few.
Myth #1. He must be an independent contractors since I only employed him for a short period of time.
Myth #2. She is an independent contractor for someone else so she must be an independent contractor for me.
Myth # 3. I have a written agreement between myself and the worker that says so.
Myth #4. Other companies in my industry use only independent contractors so it must be o.k.
But it isn’t a myth that the Internal Revenue Service, the Department of Labor, and the various States have stepped up investigation of employee classification.
The IRS focuses on back taxes and penalties and whether whether workers should be included in retirement plans. The Department of Labor wants to know whether workers should be classified as employees and eligible for overtime, minimum wage and other rights under the Fair Labor Standards Act. The States are looking to see if employers are liable for workers compensation and unemployment taxes.
Add all those up, and the cost of getting it wrong can be very, very expensive.
So what exactly is the difference between an independent contractor and an employee? The answer to that question is one of those legal concepts: "facts and circumstances".
In basic terms, it’s about control. The IRS works through a list of 20 different factors in concluding whether a sufficient degree of control exists for an employer-employee relationship. The criteria for which are under the Common Law Rules:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
So "facts and circumstances" can be subjective. Your view vs. the IRS view. Add to it that each State can also have its own definition of what constitutes an independent contractor, and it’s more complicated than the myths would suggest.
If you’re at all concerned about your workers are classified, let an experienced employment lawyer separate fact from fiction. And even if you’re not concerned, consider having your situation reviewed at least once a year. It is, you know, W-2 time.
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There is one urban myth, however, about Einstein that’s true. Albert Einstein was a ladies man. How do I know? Warren Zevon said so. Check it out on his last appearance on Letterman on October 30, 2002 singing Genius. He was indeed.