As part of the Obama administration’s stepped-up enforcement of workplace laws, the U.S. Department of Labor (DOL) plans to hire 100 additional investigators to support a joint initiative with the Department of the Treasury (Treasury) to target employers who misclassify employees as independent contractors.
Classifying employees as independent contractors isn’t illegal in itself; however doing so can be costly. Districts expose themselves to liability for unpaid employer taxes as well as a portion of both the income tax withholding that should have been taken from each employee’s paycheck and the employee’s share of Social Security tax and Medicare taxes. Misclassifying employees as independent contractors can also violate other laws such as the Fair Labor Standards Act (FLSA) when minimum wage and overtime come into play.
According to an August 2009 Government Accountability Office report to congressional leaders, 7.4 percent of the workforce is misclassified as independent contractors. Because of the failure to withhold payroll taxes, the federal government is losing tax revenue from those misclassified employees. By enforcing current laws through the joint initiative, DOL and Treasury expect to increase estimated tax receipts by more than $7 billion over 10 years.
The lack of a universal definition of what constitutes an employee presents challenges for employers. The Internal Revenue Service (IRS) previously used a 20-Factor Test that has been consolidated into 11 main tests for determining a worker’s proper status. The Texas Workforce Commission (TWC) officially adopted the original IRS 20-factor test, which can be found on the Texas Workforce Commission’s Web site 
. The DOL uses its own definition of an employee.
Generally, employees are subject to their employer’s right to control how, when, and where they perform their work. Independent contractors are not subject to control over the manner in which they deliver services. Whether or not someone is classified as an employee or an independent contractor generally depends on three common law factors described in IRS Publication 15-A , which can be found on the IRS Web site. The three factors are behavioral control, financial control, and type of relationship:
Behavioral—If the employer has the right to control how the work is done, the individual is probably an employee. The instructions given—including when and where the work is to be done, what tools or equipment to use, or what order or sequence to follow when performing the work—are behavioral control factors taken into consideration when determining employee versus independent contractor classification. The more detailed the instruction, the more control the employer exercises over the worker. When an employer provides the worker with training on how to do the job, this is considered an indication that the employer wants the work performed in a certain way and suggests that the worker is an employee.
Financial—The opportunity for the worker to either make a profit or suffer a loss is an important factor in determining classification. Independent contractors generally advertise their services, maintain a visible location, and are available to work for other employers. An independent contractor often has a significant investment in the equipment used to perform a job and is usually paid a flat fee. However, investment in equipment and payment methods vary among professions, so these factors alone won’t designate a worker as an independent contractor.
Relationship—A contract that states that a worker is an independent contractor is not sufficient to determine the work relationship. If the worker is hired with the expectation that the relationship will continue indefinitely, the worker is more than likely an employee. If a worker provides services that are a key aspect of the business and his or her work is presented as that of the employer, the worker is more likely to be considered an employee.
Even the U. S. Supreme Court acknowledges there is no single rule or test to determine if a worker is an employee or an independent contractor. However, the court has considered the following factors to be significant:
While classifying workers appropriately can be challenging, some misclassifications are easier to detect. For example, if the district already has employees working in a particular job, other individuals hired to perform the same or similar duties should be considered employees, not independent contractors. Similarly, if a district hires individuals whose duties are an integral part of education, such as a counselor, diagnostician, or speech pathologist, they are more likely to be considered employees and not independent contractors.
A new HR Services workshop entitled Rules of Engagement—Determining Employment Status will address independent contractors as well as other topics including determining contract entitlement, treatment of part-time employees, and employment of retirees and student workers.
—“Labor Agency Cracks Down on Employee Misclassification,” Mark Schoeff, Jr., Workforce Management, Feb. 16, 2010.
—“Crackdown Looms for Misclassifying Employees as Contractors,” Craig Brandt, Esq., Business Management Daily, Dec. 20, 2009.
—“The Crackdown Continues on Worker Misclassification—Employees v. Independent Contractors,” Tevis Marshall and David E. Constine III, Troutman Sanders Web site, Dec. 2, 2009.
