Having trouble deciding if someone should be classified as an “employee” vs. a 1099 contractor? Here is a test that should help you determine the difference.
Independent contractors are self-employed – they are independent business entities in a position to make a profit or loss based upon how they manage their own independent enterprise – an employer of such an individual is merely one of the clients of that contractor.
1. Most states and IRS use similar tests to determine whether given workers are employees or independent contractors.
2. Whether the test applied is the common-law direction and control test, the ABC test, the economic realities test, or the IRS eleven-factor test, the issues are basically the same – all the tests boil down to whether the employer exercises direction and control over the performance of the services of the worker.
3. All the laws presume that a worker performing services for pay is an employee – if an employer thinks otherwise, it has the burden of proof in almost any possible legal situation.
4. Keep these characteristics of independent contractor arrangements in mind:
a. The employer generally seeks the independent contractor out, not vice versa.
b. The employer has to negotiate terms with the independent contractor.
c. Training is not an issue – contractors are experts and should not need training.
d. The employer is buying a finished project or completed service, rather than hours of work on an ongoing basis.
e. Non-competition agreement → no – such an agreement is strong proof that the worker’s services are directly integrated into the primary service provided by the employer.
f. Non-solicitation agreement → maybe – keep it narrowly tailored to protect the company’s relations with the clients served by the contractor – anything stronger than that will resemble a non-competition agreement.
g. Non-disclosure agreement → usually OK, but be careful – keep it as narrow and tightly-focused as possible to protect the confidential information to which the contractor will have access during the project.
5. TWC tax examiners look for certain “red flags”:
a. Terms such as “1099 employees” or “contract labor”
b. Having contractors wear company badges or uniforms indicating their affiliation with the company
c. Giving contractors a company e-mail address or cc’ing them on company e-mails
d. Inviting contractors to company parties and other events using the same invitation that goes to regular employees
e. Giving contractors company benefits or wage advances
f. Having contractors sign company policy handbooks
g. Non-competition agreements (as noted above)
6. In an audit situation, an employer should try to show:
a. Contractors’ business cards indicating how the contractors are in business for themselves
b. Contractors’ invoices to your company on their own stationery
c. Copies of any advertisements they use for their own businesses
d. Links to the contractors’ Web sites
e. Written contracts for provision of services or performance of a project, one of the provisions of which covers recourse for premature termination of the contract and non-completion of the work (that is to help show that there is not an at-will employment relationship)
f. E-mails, letters, or other documentation relating to negotiating the parameters of the work