By George F. Indest III, J.D., M.P.A., LL.M., Board Certified by the Florida Bar in Health Law
There are serious legal repercussions in incorrectly treating an employee as an independent contractor. Attention to the factors used by the IRS and other regulatory bodies in examining the issue may help to keep you out of trouble. In this 3-part blog, we will examine tests and factors used to determine whether a worker should be classified as an employee instead of an individual contractor. To read Part 1 and view the first 10 factors of the IRS 20 Factor Test, click here.
The IRS 20 Factor Test (Cont.)
11. Requirements for reports. If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.
12. Method of payment. Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.
13. Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.
14. Provision of tools and materials. Workers who perform most of their work using company-provided equipment, tolls, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.
15. Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.
16. Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.
17. Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.
18. Availability to public. If a worker regularly makes services available to the general public, this supports an independent contractor determination.
19. Control over discharge. A company's unilateral right to discharge a worker suggests an employment relationship. In contrast, a company's ability to terminate independent contractor relationships generally depends on contract terms.
20. Right of termination. Most employees unilaterally can terminate their work for a company without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.
Are independent contractors actually your employees?
As previously stated, one factor is determinate of whether a worker should be classified as an employee or an independent contractor. However, we have developed a few rules of thumb that might help to guide making a quick determination.
As a rule of thumb, non-professional employees (those without a professional license), providing work on a regular basis for the employer, should be treated as employees. Those who provide routine work on an hourly basis, whether part time or full time, should be treated as an employee. Therefore, for a medical business, employees such as the receptionist, medical records clerk, medical assistants, scribes, licensed practical nurses (LPN's), phlebotomists, internal billing and coding personnel, computer/network technicians, and others providing non-professional services should be treated as employees.
The individual is a professional or a "quasi-professional" such as a bookkeeper or outside biller may qualify to be treated as an independent contractor. If that person provides services for a portion of the work week and also has other clients or businesses that he/she provide similar services for, it is more likely that the person qualifies as an independent contractor.
Only individuals may be employees; another corporation, company, professional association, or other business entity cannot be an employee.
Many physicians, advanced registered nurse practitioners (ARNP's), dentists, and other licensed health professionals have created their own business entities. These business entities may be a business corporation (usually designated with the abbreviation "inc.", or "corp."), a limited liability company ("LLC"), or professional service corporation ("PSC" or "PA", the latter standing for "professional association"). Since a business entity in the US can never be classified as an employee, in contracting with a corporation or company such as these, will be one way in which an employer knows that the individual actually providing the services does not have to be treated as an employee. A contract for services between two corporations, companies, or business entities, can only be classified as independent contractor agreements. The individual may be an employee of his or her own company or corporation. However, that company or corporation, when it contracts with your business, can only be an independent contractor.
Therefore, if you want to be certain that the professionals who are providing services to your business are being legally treated as independent contractors, make sure your business only enters into an agreement with their company or corporation. Usually this type of contract is called an "independent contractors agreement," "professional services agreement," or a "contract for services."
More tips on properly classifying workers as employees or independent contractors will be provided in part 3 of this blog. Click here to read part 1 of this 3-part blog series.
Do you think the IRS 20 Factor Test is useful to determine whether an individual may be treated as an employee or an independent contractor? Are the final 10 tests listed above sufficient enough guidelines? Please leave any thoughtful comments below.
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About the Author: George F. Indest III, J.D., M.P.A., LL.M., is Board Certified by The Florida Bar in Health Law. He is the President and Managing Partner of The Health Law Firm, which has a national practice. Its main office is in the Orlando, Florida, area. www.TheHealthLawFirm.com The Health Law Firm, 1101 Douglas Ave., Altamonte Springs, FL 32714, Phone: (407) 331-6620.
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