Contingent Workers Training for Supervisors: Part IV

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Introduction

Employers use various types of workers to perform the services they require. Most of these workers are classified as employees. Other types of workers are non-employees or contingent workers, such as temporary staffing agency employees and independent contractors. Correct classification of workers as employees or contingent staff has always been an important employer responsibility. It was not until the landmark Microsoft class action lawsuit, however, over a decade ago that employers became acutely aware of the costs of misclassification and the tax, the Employee Retirement Income Security Act (ERISA), employment law, and civil lawsuit consequences. To avoid these costly errors, employers need to train new and retrain current supervisors on the use of contingent workers.

These sample presentations on contingent workers are structured to be given in three sessions and are organized into six parts. The first session (Parts 1-3) includes the definition and types of contingent workers and covers leased employees, temporary staffing agency employees and co-employment. The second session (Part 4) pertains to independent contractors. The third session (Part 5) covers interns and includes Part 6 which is a Quiz. The sessions are intended for presentation to supervisors and other individuals who hire and manage workers. They are designed to be presented by an individual who has comprehensive knowledge of contingent workers and relevant employment laws. These sample presentations must be customized to include state laws and the employer’s own policies and practices.

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Presentation Contents

• This training session is the fourth part of our five-part series on Contingent Workers. It is Part 4 –Independent Contractors.

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Objectives

At the close of this session, you will be able to:

• State the definition of an independent contractor• Cite the three IRS primary categories for a worker to be classified as

an independent contractor• Describe elements of the three categories

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Definition of Independent Contractor

• An independent contractor is defined as a self-employed individual who performs a service for an employer under an express or implied agreement and who is not subject to the employer's control, or right to control, regarding the method and means in which the service is performed.

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IRS Primary Categories for a Worker to be classified as an Independent Contractor

The three IRS primary categories are:

• Behavior Control• Financial Control • Type of Relationship

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Category 1 – Behavior Control

The less control the employer has over the worker’s behavior, the more likely it is that the worker would be considered an independent contractor.

The more control the employer has over the worker’s behavior, the more likely it is that the worker would be considered an employee.

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Category 1 – Behavior Control (cont’d)

If the employer:

• directs and controls how the worker performs the work

• has the right to control the details of the worker’s performance

• and provides training to the worker on how to perform the work

the more likely it is that the worker ought to be classified as a employee and not an independent contractor.

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Category 2 - Financial Control

Financial control pertains to the degree to which the employer has the right to control the business aspects of the worker’s job.

Factors that are considered in establishing whether the worker is an independent contractor or an employee are:

• Profit made or loss incurred by the worker – If a profit may be made or a loss incurred, the worker is more likely an independent contractor; if not, the worker is more likely an employee.

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Category 2 - Financial Control (cont’d)

Additional factors that are considered in establishing whether the worker is an independent contractor or an employee are:

• Business expenses – If business expenses are not reimbursed, the worker is more likely an independent contractor; if business expenses are reimbursed, the worker is more likely an employee.

• Personal investment in the work – If the worker provides his/her own equipment and supplies, for example, the worker is more likely an independent contractor; if not, the worker is more likely an employee.

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Category 2 - Financial Control (cont’d)

Additional factors that are considered in establishing whether the worker is an independent contractor or an employee are:

• Availability of services of the worker to the relevant market – If the services are available to the relevant market, the worker is more likely to be an independent contractor; if not, the worker is more likely to be an employee.

• Method of payment – An independent contractor is paid (usually through accounts payable) with no employment or other taxes deducted and is provided a Form 1099 at year end. An employee is paid (through payroll accounts), has employment and other taxes withheld and is provided a W-2 Form at year end.

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Category 3 – Type of Relationship

Factors to be considered regarding type of relationship between the employer and the worker are:

• Written contracts – Employers usually enter into written contracts with independent contractors but not with employees with the exception of high-level executives.

• Benefits – Benefits, such as health insurance, paid leave, retirement plans are not provided to independent contractors but are frequently given to employees.

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Category 3 – Type of Relationship (cont’d)

Additional factors to be considered regarding type of relationship between the employer and the worker are:

• On-going working relationship – If the work is expected to be completed at the conclusion of a project or period of time, it is likely that the worker is an independent contractor. If there is an expectation that the work will exist on an ongoing basis, it is likely that the worker is an employee.

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Questions ? Comments ?

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Summary

• An independent contractor is a self-employed individual who performs a service for an employer under an express or implied agreement and who is not subject to the employer's control, or right to control, regarding the method and means in which the service is performed.

• The three primary IRS categories for determining classification of a worker as an independent contractor are behavior control, financial control and type of relationship.

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Summary (Cont’d)

• Behavior control relates to the extent the employer directs and controls how the worker performs the work and whether the employer provides training on how to perform the work.

• Financial control pertains to whether the employer controls the business aspects of the worker’s job.

• Type of relationship focuses on whether there is a contract between the employer and the worker, whether benefits are provided, and if the expectation of an on-going working relationship.

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Course Evaluation

Please be sure to complete and leave the evaluation sheet you received with your handouts.

Thank you for your attention and interest!