As an employer, you’re constantly looking for ways to diversify the talent you have working for you — but that’s not always easy on a limited budget. Hiring an independent contractor on an as-needed basis can help.
You need to tread carefully, however, to make sure that you don’t mistakenly misclassify an employee as an independent contractor and end up in a complicated dispute or legal action over workers’ compensation, taxes and other issues.
The 20-factor test gives way to three main questions
In the past, the Internal Revenue Service (IRS) used a 20-factor test to evaluate whether a worker was an employee or an independent contractor. This test looked closely at the interactions between the company and the worker to determine, based on the totality of the facts, how that worker should be classified.
Today, however, the IRS essentially takes a broad look at three main areas of concern:
- Who has behavioral control? The more closely that the company controls how, where and when the work is done, the more likely it is that a worker is an employee and not an independent contractor.
- Who has financial control? This includes things like whether the worker makes their services broadly available to other companies, handles their own business expenses and provides their own equipment and tools — all of which are common to independent contractors, not employees.
- What is the relationship between the parties? How permanent is the relationship? Are their contracts that govern each party’s obligations or are they free to terminate their working relationship at any time? How integral is the worker’s services to the company’s business?
Again, it’s worth noting that no one factor rules all. Rather, it’s the totality of the picture that matters.
It can be frustrating to be accused of employee misclassification when you believe your actions were above-board. Working with an experienced advocate can help you defend your company’s interests.