Independent contractors: Are they or aren't they?Dr. Paul A. Munozwage and hour issues, employment status, common law factors
The issue of independent contractors (ICs) continues to haunt
employers and may have an impact on the mortgage industry. Many
mortgage brokers hire their sales staff as contractors for any
number of reasons. The key to determining whether an individual is
an IC or an employee is based on a number of factors.
The Internal Revenue Service uses the common law factors listed
below to determine whether or not a worker is an IC or a regular
employee. Please remember that all of the factors must be taken
into consideration when determining contractor/employee status:
1. Instructions. An employer should not tell an
independent contractor how to do a job.
2. Training. An employer should not provide
substantial training for an independent contractor.
3. Integration. An independent contractor
should not be hired to provide a service that is an essential part
of an employers business.
4. Personal services. An employer should not
insist that the work be performed by the contractor rather than
someone that the contractor might hire.
5. Assistants. Independent contractors control
and pay their assistants.
6. Length of relationship. Independent
contractors should not have a continuing relationship with an
employer unless there are multiple contracts.
7. Work hours. An independent contractor
usually determines the hours worked to complete a job.
8. Amount of work. An independent contractor
should not be told to work full-time for an employer if that would
prevent the contractor from doing other work.
9. Location. Unless the services can be
performed only in one location, an independent contractor chooses
where to do the work.
10. Sequence of work. Independent contractors
determine the order in which they accomplish their tasks.
11. Reports. Independent contractors should not
be required to produce interim reports.
12. Payment. Independent contractors are paid
for the results of their work, not for the time worked.
13. Expenses. Independent contractors are
responsible for their business expenses.
14. Tools. Independent contractors typically
provide their equipment and tools.
15. Investment. An independent contractor has a
significant investment in their business, such as a home
office.
16. Profit. Independent contractors can realize
profits and incur losses.
17. Multiple jobs. Independent contractors can
work for more than one employer at one time.
18. Availability. Independent contractors make
their services available to the general public.
19. Termination. Independent contractors cannot
be fired at will, as employees can.
20. Liability. Independent contractors are
liable for failure to complete a job.
The wrong determination can have disastrous consequences.
Microsoft Corporation had hired a large number of ICs to work on
many projects within the company. They were hired for specific
projects, but many of them worked for a number of years on these
projects, performed many of the same tasks as regular employees,
and were provided with workspace, equipment and supplies. When an
IRS audit was performed, based on the aforementioned and some other
factors, these contractors were deemed to be employees. Microsoft
settled these cases for $96.9 million.
Some items to keep in mind for mortgage salespeople:
•The greater the skill required, the more likely the
person is an IC. The ability to sell in the mortgage industry is a
specific skill.
•If the individuals supply their own tools and materials, it
reflects IC status. Providing a salesperson with these items will
raise a red flag.
•If individuals are in business for themselves and have all
of the appropriate licenses and tax identification numbers, this
would suggest an IC relationship. Having sales staff become S
corporations will help.
•If the employer determines the work schedule, this reflects
an employee relationship. Sales staff should be on their own in
terms of hours worked. Requiring a few hours on site on a regular
basis can erode the IC relationship.
•If the individual is treated as an employee for tax
purposes, this creates an employee relationship. If it looks like
an employee, acts like an employee and "feels" like an employee, it
probably is!
Guessing the employment status or creating an independent
contractor status to reduce administrative headaches makes you very
vulnerable. Conduct an audit of your company's employees and
reclassify anyone who does not meet the 20-question test. IRS
codes, wage and hour, benefit and discrimination laws are more of a
nightmare. The best advice? Use the guidelines detailed above, be
realistic in your approach and err on the conservative side.
Dr. Paul Munoz is president of the Plainview, N.Y.-based HR
Group Inc., a human resources consulting firm. He may be reached at
(516) 433-6588 or e-mail
[email protected].
