The BIG Question…Are They An Independent Contractor, Or Not?

This question continues to haunt employers of all sizes, but most specifically those that hire sales staff as independent contractors.  Many companies choose to hire contractors to fill the role of sales professional for a number of reasons.  The key to determining whether an individual is an independent contractor or an employee is based on a series of factors.  This is applicable to any role a person would fulfill, not just a sales professional.

The IRS uses the 20 common-law factors listed below to ascertain whether a worker is an independent contractor or a regular employee. Please remember that ALL the factors must be taken into consideration in determining compliant contractor/employee status:

1. Instructions. An employer shouldn’t tell a contractor how to do their job.
2. Training. An employer shouldn’t provide substantial training for a contractor.
3. Integration. A contractor shouldn’t be hired to provide a service that is an essential part of an employer’s business. 
4. Personal Services. An employer shouldn’t insist that the work be performed by the contractor rather than someone that the contractor might hire. 
5. Employees. Contractors control and pay their employees. 
6. Length of Relationship. Contractors shouldn’t have a continuing relationship with an employer unless there are multiple contracts.
7. Work Hours. A contractor usually determines the hours worked to complete a job.
8. Amount of Work. A contractor shouldn’t 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, a contractor chooses where to do the work. 
10. Sequence of Work. Contractors determine the order in which they accomplish their tasks. 
11. Reports. Contractors should not be required to produce interim reports. 
12. Payment. Contractors are paid for the results of their work, not for the time worked.
13. Expenses. Contractors are responsible for their business expenses.
14. Tools. Contractors typically provide their equipment and tools. 
15. Investment. A contractor has a significant investment in his business, such as a home office. 
16. Profit. Contractors can realize profits and incur losses. 
17. Multiple jobs. Contractors can work for more than one employer at a time. 
18. Availability. Contractors make their services available to the general public.
19. Termination. Contractors cannot be fired at will, as can employees.
20. Liability. Contractors are liable for failure to complete a job.

The wrong determination can have disastrous consequences. Microsoft Corporation had hired a large number of Independent Contractor’s 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, they performed many of the same tasks as regular employees and they were provided with workspace, equipment and supplies. When an IRS audit was performed, based on the above 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 sales people:

• The greater the skill required, the more likely the person is an Independent Contractor. The ability to sell is a specific skill. 
• If the individual supplies his/her own tools and materials, it reflects Independent Contractor status. Providing a salesperson with these items will raise a red flag. 
• If the individual is in business for him/herself and has all the appropriate licenses and tax identification numbers, this would suggest an Independent Contractor 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 Independent Contractor relationship. 
• If the individual is treated as an employee for tax purposes, this creates an employee relationship.

Bottom line…If it looks like an employee, it acts like an employee and it “feels” like an employee, it probably is!!