Classifying workers as independent contractors or employees is a complex exercise with the rules changing ever so often. In the recent past, the IRS has labeled nine clarifying factors while the National Labor Relations Board (NLRB) eliminated three factors to make clear the definition of an independent contractor.
As an employer, it can be difficult for you to classify your workers accurately and remain on the right side of the law with the frequent changes in regulations. A reputable employment business attorney in Alabama can help you stay abreast with the latest changes to prevent any costly misclassification errors from occurring.
Classifying Factors Set Forth by the Department of Labor
There is no single test or rule for classifying someone as an employee or independent contractor for the purpose of the Fair Labor Standards Act (FLSA) as per the US Supreme Court. But here is a set of factors that the Court has deemed significant in order to make this determination:
- The permanency of the relationship.
- Extent to which the services rendered are integral to the principal’s business.
- Amount of the alleged contractor’s investment in equipment and facilities.
- Degree and nature of control by the principal.
- Alleged contractor’s opportunity for profit and loss.
- Amount of foresight, judgment, and initiative in open market competition for the success of the claimed independent contractor.
- Degree of independent operation and organization.
For the purpose of FLSA, the following is considered immaterial:
- Place of work.
- Absence of any formal employment agreement.
- Whether the alleged independent contractor is licensed by the local or state government.
- Time and mode of pay.
The biggest determinative factor is the degree of control. You can classify your worker as an independent contractor if they:
- Choose the hours of work.
- Are not supervised or monitored.
- Do not receive performance evaluations.
- Are not bound by a non-compete agreement.
- Do not receive performance evaluations.
- Are permitted to work for other businesses.
However, if the workers are working long hours (50 – 70 hours a week), have their work inspected, need to sign a non-compete agreement, or receive performance evaluations, they need to be classified as employees.
Employee Classifying Factors from the Perspective of the IRS
The IRS is more concerned about its tax base. You need to withhold income taxes while paying Social Security, unemployment taxes, and Medicare taxes where employees are concerned. These are the two key factors to keep in mind when classifying a worker:
- Control: A business that controls the work accomplished and how it’s done is exerting behavioral control. If the business controls or directs financial aspects, it exerts financial control. In such a situation, the worker may not be classified as an independent contractor
- Relationship: The manner in which a worker and employer perceive their relationship is necessary for determining worker status. If the employer provides the worker with an insurance plan, vacation, sick pay, and pension plan, the worker may need to be classified as an employee. Other aspects include written agreements, permanency of the relationship, and the extent to which the worker has unreimbursed expenses.
You can use Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding if you are unsure about classifying a worker as an independent contractor or employee.
National Labor Relations Board (NLRB) Test for Classifying Employees in Alabama
The majority of small business owners don’t have unionized employees making them unfamiliar with this test. These factors apply whether or not the workers are unionized:
- Extent of control over the worker.
- Whether the worker is engaged in a distinct business or occupation.
- Whether the work is performed under the supervision or direction of an employer.
- Whether specialized training, skill, or license is required.
- Length of time involved in providing services.
- Method of payment.
- Responsibility for purchasing and maintaining tools, instruments, and supplies.
- Whether the work is part of the employer’s regular business.
- Whether the parties have signed an independent contractor agreement.
- Whether the principal has a business.
Potential Concerns over Misclassification in Alabama
Businesses usually get in trouble for not paying overtime where worker misclassification is concerned. Employers routinely misclassify their employees as independent workers to save money. This is because employers don’t get sued for most discrimination laws, don’t need to pay taxes on independent contractors, and don’t need to deal with unions either.
Unfortunately, things can take a costly turn if you get caught. You will be on the hook for back pay, which can be an extraordinarily high amount. In most cases, if employers have misclassified one worker, they have misclassified the entire group. An experienced business law attorney can prove to be useful in such instances.
You need to understand that these are not your usual $2,000 settlements. Instead, they are sufficiently high enough for the company to go bankrupt. Misclassification of employees is also a federal offense with jail time. An informed business law attorney will pursue all legal options to find one that is the most helpful in the situation.
Our Trusted Attorneys are Here to Give You the Best Legal Advice and Support. Call Now.
If you are caught in an investigation for misclassifying your workers or not paying taxes and overtime – you can expect an investigation from other agencies as well. The strategy-driven attorneys at the BHM Law Group have the necessary experience, legal knowledge, and resources to provide you with robust legal representation, fight any potential claims against your firm, and protect your rights.
Our attorneys have helped numerous businesses in Alabama avoid getting into such situations entirely by following all the relevant rules and regulations while finding legal ways to maximize profits. To schedule your free and confidential consultation with our legal team, call us at (205) 964-9764 or fill out this online contact form.