Many employers classify workers as independent contractors to avoid:

  • the minimum wage or overtime requirements of the Fair Labor Standards Act
  • IRS’ and state requirements for employee benefits and payroll taxes (including withholding)
  • laws governing discrimination in the workplace
  • worker’s compensation insurance

Persons classed as independent contractors have sued employers seeking employee benefits. E.g., Microsoft settled a class-action filed on behalf of thousands of contingent workers for around $100 million.

Who are employees ?

See IRS web site on information for businesses with employees and who is an employee 10/10/07

Withholding of tax on payments to foreign athletes and entertainers may be required. 9/24/08

Under § 530(a) of the Revenue Act of 1978, as amended, unless there is NOT a reasonable basis, “employers” can treat persons as NOT an employee under certain circumstances.

Rev. Rule. 87-41, 1987 CB 296 – “Guidelines for classification as employees or independent contractors” – COMMON LAW RULES generally determine if the employer/employee relationship exists [Guides for determining that status are found in the following three substantially similar sections of the Employment Tax Regulations: § 31.3121(d)-l(c); § 31.3306(I)-1; and § 31.3401(c)-l.]

  • Taxes covered by the Revenue Rule:
  • The person for whom the services are performed has the RIGHT to CONTROL and direct the individual performing the services as to WHAT shall be done [WHEN, WHERE,] AND HOW it shall be done. ACTUAL control is NOT required.
  • Conversely, individuals (such as physicians, lawyers, dentists, contractors, and subcontractors) who follow an INDEPENDENT TRADE, BUSINESS, OR PROFESSION, IN WHICH THEY OFFER THEIR SERVICES TO THE PUBLIC, generally are NOT employees.
  • Designation or description of the relationship by the parties is immaterial [partner, co adventurer, agent, independent contractor, or the like]
  • Whether the Firm or the Client qualifies for employment tax relief under § 530(a) of the 1978 Act; and
  • Whether any such relief is denied the Firm under § 530(d) of the 1978 Act (added by § 1706 of the 1986 Act).