1

But when it comes to Employee vs. Independent Contractor…disguises just don’t work!

2

Are You Sure Your Independent Contractors Are NOT Your

Employees?

Jim Whitton, AttorneyBrackett & Ellis, P.C.

3

Why is this important?

4

According to the 2010 Census Report

10.3 Million Workers Classify Themselves as Independent Contractors

5

According to estimates from the Government Accountability Office

$2.72 billionin lost revenuesfor the federal government

6

• Federal lawmakers

• Private Individuals

• Federal and State Agencies

7

Joint Initiative Between DOL and IRSSix page MOU signed September 19, 2011 by

the Commissioner of Internal Revenue and the Secretary of Labor

8

• DOL Strategic Plan for Fiscal 2011-2016 targets specific industries• Construction• Janitorial• Home health care• Child care• Transportation and warehousing• Meat and poultry processing• Professional and personal service industries

9

BUT…COLLEGES AND SCHOOL DISTRICTS ARE NOT

10

Independent Contractor Employee

No withholding is required Withhold taxes such as federal income tax, unemployment tax

Payments reported on a Form 1099 Payments and taxes reported on a Form W-2

Generally not entitled to benefits such as sick days, retirement, and insurance.

Generally entitled to benefits and most are covered by the Teacher Retirement System of Texas (TRS)

Do not benefit from legal protections, ex. workers’ compensation

Enjoy various legal protections when serving in their role as a public school employee

11

Education institutions are being investigated by our friends at the Internal Revenue Service (IRS) for incorrectly classifying individuals as independent contractors when they should be paid as employees.

12

In an audit, no stone is left unturned…

• All payroll records, journals, and other records of compensation• General ledger• Cash disbursement journal/check register• Forms w-2,w-3,w-4, 1099, etc.• Annual financial report• Copies of all contractor contracts• List of all people who paid rent for use of facilities, equipment, etc.• Vehicle usage and policies• Employee Handbook• Expense reimbursements• Vendor lists

And the list goes on….

13

Why use Independent Contractors?

14

Benefits of Independent Contractors

• Flexibility

15

Benefits of Independent Contractors

• Flexibility

• No income taxes withholdings

16

Benefits of Independent Contractors

• Flexibility

• No income taxes withholdings

• No payment of payroll taxes or unemployment insurance premiums

17

Benefits of Independent Contractors

• Flexibility

• No income taxes withholdings

• No payment of payroll taxes or unemployment insurance premiums

• Avoid benefit costs

18

Benefits of Independent Contractors

• Flexibility

• No income taxes withholdings

• No payment of payroll taxes or unemployment insurance premiums

• Avoid benefit costs

• No need for training

19

Benefits of Independent Contractors

• Flexibility

• No income taxes withholdings

• No payment of payroll taxes or unemployment insurance premiums

• Avoid benefit costs

• No need for training

• Not liable (usually) for worker torts

20

Benefits of Independent Contractors

• Flexibility

• No income taxes withholdings

• No payment of payroll taxes or unemployment insurance premiums

• Avoid benefit costs

• No need for training

• Not liable (usually) for worker torts

•Avoid liability for employment-based claims

21

Disadvantages of Independent Contractors

• loss of control over workers

• less stable work force

• decreased worker loyalty

• And ….

22

Misclassification Issues

23

Misclassification Issues

• Tax

24

Misclassification Issues

• Tax• FLSA

25

Misclassification Issues

• Tax• FLSA• Benefit/ERISA

26

Misclassification Issues

• Tax• FLSA• Benefit/ERISA• Other employment laws

27

Misclassification Issues

• Tax• FLSA• Benefit/ERISA• Other employment laws• Unknown/Unforeseen exposure

28

Misclassification Issues

• Tax• FLSA• Benefit/ERISA• Other employment laws• Unknown/Unforeseen exposure

29

Misclassification Issues

• Tax• FLSA• Benefit/ERISA• Other employment laws• Unknown/Unforeseen exposure• Domino Effect

30

Are your workers independent contractors?

31

Worker Status Tests

• Common Law – Right to Control Test

• Economic Realities Test

• Hybrid Test

• IRS Test

• TWC Test

32

Right to Control Test

33

Right to Control Test• Does the college or district instruct the individual as to when,

where, and how work is performed?• Is the work usually done under the direction of the college or

district? • Who supplies tools and materials? • Does the college or district set the hours of work?• Is the work performed on college or district property?• What specific training and/or instruction does the college or

district provide?• Does the college or district pay the individual by the hour, by

daily rate, by the week, or by month?• Is the work part of the regular business?• What is the intent/belief of the parties?

34

Economic Realities Test

• Employee benefits• FLSA • FMLA

35

Economic Realities Test• Does the college or district have the right to control the manner and means by

which the product is accomplished?• What is the level of skill required?• What is the source of the instrumentalities and tools?• What is the duration of the relationship between the parties?• Does the college or district have the right to assign additional projects to the

individual?• What is the extent of the individual’s discretion over when and how long to

work?• What is the method of payment?• What is the individual's role in hiring and paying assistants?• Is the work part of the regular business of the college or district?• Is there the provision of employee benefits?• What is the tax treatment of the individual?

36

The Hybrid Test

• Combines Right to Control and Economic Realities Test

• Commonly used in Title VII (discrimination) cases

37

The IRS Test

• Behavioral control

• Financial control

• Type of relationship of the parties

38

Behavior Control

• Does the college or district have a right to direct and control task performed?– Considers instructions

• When and where does the work occur?• What tools or equipment to use?• What workers to hire or to assist with the work?• Where to purchase supplies and services?• What work must be performed by a specified individual?• What order or sequence to follow?

– Training provided

39

Financial Control• Focuses on facts that show a worker’s opportunity to

realize a profit or loss

• Examines extent the worker has unreimbursed business expenses

• Considers the extent of the worker's investment

• Considers extent the worker makes services available to the relevant market

• Examines how the business pays the worker

40

Type of Relationship• Written contracts describing the relationship the parties intended to

create

• Whether the college or district provides the individual with employee-type benefits such as insurance, a pension plan, vacation pay, or sick pay

• What is the permanency of the relationship?

• The extent to which services performed by the worker are a key aspect of the regular business of the college or district

41

Texas Workforce Commission Test

• Under the Act, “employment” means a service, including service in interstate commerce, performed by an individual for wages or under a express or implied contract of hire, unless it is shown to the satisfaction of the Commission that the individual’s performance of the service has been and will continue to be free from control or direction under the contract and in fact

• Adopted old IRS 20-Factor Test

42

What can we do to reduce risks and liabilities?

43

Playing it Safe • Consistency in your reporting

• Educate your campus and administrators

• Treat all workers who perform similar service the same

• Go through the factors to determine• Right to control behavior• Right to control financial aspects• The nature of the relationship

• Make certain your method of performing criminal background checks is aligned

• And…

44

Reducing Misclassification Risks and Liabilities

• Know your workforce

45

Reducing Misclassification Risks and Liabilities

• Know your workforce• Pay attention to your

contracts

46

Contracts for IC

• Avoid using the word “control” and similar terminology.• State that the IC controls manner and means of work.• Make clear that the college or district is only interested in the result.• Specifically state that the relationship is one of independent contractor.• Use IC’s business format (i.e. corporation, LLC, LLP).• Make payments to the worker’s business entity, as opposed to the

individual.• Place responsibility for taxes, insurance, business licenses on IC • Make IC responsible for own employees, general liability insurance,

unemployment and workers’ compensation or non-subscriber alternative plans for any of their own employees, and all applicable taxes for his/her employees.

• Require only compliance with industry standards.• Do not require progress reports or performance reviews.• Avoid payment by the hour, day or week. Pay by the project or task.• Avoid requiring specific hours or days to work.• Avoid requiring specific location where the work must take place, if

possible.• Specifically state IC to provide his/her own tools, equipment, supplies

and related items.• Include a waiver of any right to participate in any college or district

benefits.• Specify the length of the relationship, rather than an indefinite period

of time.• Specify that IC can provide services to others.• Avoid contract provisions allowing for termination at will.• Specify cause for contract termination.• Specify IC responsible for own training, continuing education.

47

Reducing Misclassification Risks and Liabilities

• Know your workforce• Pay attention to your

contracts• Educate campus and

administrators

48

Reducing Misclassification Risks and Liabilities

• Know your workforce• Pay attention to your

contracts• Educate campus and

administrators• Conduct internal audits

49

Reducing Misclassification Risks and Liabilities

• Know your workforce• Pay attention to your

contracts• Educate campus and

administrators• Conduct internal audits• Review employee

compensation policies

50

Reducing Misclassification Risks and Liabilities

• Know your workforce• Pay attention to your

contracts• Educate campus and

administrators• Conduct internal audits• Review employee

compensation policies• Review ERISA plans

51

Reducing Misclassification Risks and Liabilities

• Know your workforce• Pay attention to your

contracts• Educate campus and

administrators• Conduct internal audits• Review employee

compensation policies• Review ERISA plans

• Consider an internal complaint process

52

Reducing Misclassification Risks and Liabilities

• Know your workforce• Pay attention to your

contracts• Educate campus and

administrators• Conduct internal audits• Review employee

compensation policies• Review ERISA plans

• Consider an internal complaint process

• Be careful of reemployment of former employees

53

Reducing Misclassification Risks and Liabilities

• Know your workforce• Pay attention to your

contracts• Educate campus and

administrators• Conduct internal audits• Review employee

compensation policies• Review ERISA plans

• Consider an internal complaint process

• Be careful of reemployment of former employees

• Change business model

54

Reducing Misclassification Risks and Liabilities

• Know your workforce• Pay attention to your

contracts• Educate campus and

administrators• Conduct internal audits• Review employee

compensation policies• Review ERISA plans

• Consider an internal complaint process

• Be careful of reemployment of former employees

• Change business model• Take advantage of IRS

provisions

55

56

Questions?

#399964

Jim WhittonBrackett & Ellis, P.C.

100 Main StreetFort Worth, Texas 76102-3008

jwhitton@belaw.com817-339-2473