Worker Classification as an Independent Contractor or Employee
In today’s modern workplace, where workers are not always located on-site, may have more autonomy, and may prefer not to be “employed” in the usual sense, employers must remain vigilant to properly classify their workers. Employers are ultimately responsible for properly classifying workers with state and federal agencies, taxing authorities, and the courts. It remains important for employers to accurately and appropriate classify workers, even if the worker wants to be classified a certain way, in order to avoid exposure to unintended risk.
How does an employer determine if a worker should be classified as an employee or an independent contractor? More importantly, how can the employer defend its classification of the worker as an independent contractor (“I/C”) if that classification is later challenged by a government agency, such as the United States Department of Law, the Georgia Department of Labor, the Internal Revenue Service, or by an attorney representing a terminated I/C?
The starting point is what is known as the “common law test” in Georgia. That test largely involves the amount of control the employer exercises over the worker. Does the employer control the time, method, or manner in which the job is performed? The Internal Revenue Service provides important guidance for tax purposes (www.irs.gov/pub/irs-pub/p15a.pdf).
For example, a shift worker in a factory is expected to arrive at a certain time, work on a machine or assembly provided by the employer in a way determined by the employer. Such an arrangement is a classic example of an employment relationship, not an independent contractor relationship.
In contrast, if the employer hires a consultant to analyze the factory floor, and it requests a report that is to be delivered by the consultant within a month, that is a classic example of independent contractor or 1099 work. The consultant controls her hours, the methods she employs in making the analysis, her tools she uses in performing, and the time she spends in performing, so long as the report is delivered on time. She performs these services for multiple businesses, not just the one employer. Her engagement has a definite beginning and end. All of these factors show independence rather than control.
Obviously, there are many cases between these two extremes. Employees who have been working for a particular employer for a number of years may wish to strike out on their own, but continue to perform certain functions for an employer as an I/C. Employers may find that a certain function is better suited to I/C work. It is important that a proper analysis be made and that a contract be put in place to avoid issues down the road. Having proper job descriptions and position analysis will help an employer defend its classification. Ultimately, it is the nature of what the worker is doing, how it is done, and how much control the employer exerts over the worker that will determine the worker’s classification. Employers are well served to have their legal and accounting advisors help them make the classification determination of employee versus I/C from the outset of the relationship, rather than trying to justify an arbitrary decision after the fact to a court or government agency.