Independent Contractor VS Employee

Safegaurd International EOR PartnerToday’s guest blogger is Eric Snethkamp, global channels & strategic alliances manager for SafeGuard World International and a Alliance Partner of International Staffing Consultants. For nearly a decade, organizations around the world have relied on SafeGuard World for their global HR needs, specifically around payroll and employee compliance

The new age of “The Uber Economy” or “the Gig Economy” has brought the Independent Contractor engagement model into the spotlight. On any given day you’ll find headlines covering the successes and failures of Independent Contractor engagements. Unfortunately, many of those headlines feature words like “misclassification” and “lawsuit”.

The need to engage with workers for short or long time periods, or for specialized services, or out of necessity when expanding internationally is only going to keep growing. As a result, new tools, structures and services are continually created to help facilitate the engagement of Freelancers or Independent Contractors. In this post, we’re going to explore how governments define the engagement of Independent Contractors including problem areas and potential solutions.

First, and most importantly, we should understand what defines an Independent Contractor versus a Direct Employee.

When engaging people in a working relationship internationally, determining if a worker is an Independent Contractor or Direct Employee varies from country to country. In general, the more a business controls the work activities of an Independent Contractor, the more likely that business can be classified as an employer.

Some general considerations are:

  • Who controls how the work is performed?
  • Does the contractor have other clients?
  • Is the contractor paid by the project or by the hour?
  • Is the contractor paid as part of payroll or does the contractor invoice for their work?
  • Are benefits such as vacation and sick leave provided?
  • Does the contractor work their own schedule and supply their own work location and supplies?

Many countries have regulations similar to those of the IRS which can act a general starting point to begin making the determination.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

 

From IRS Rev. Rul. 87-41:

Over the years courts have identified on a case-by-case basis various facts or factors that are relevant in determining whether an employer-employee relationship exists. In 1987, based on an examination of cases and rulings, the Internal Revenue Service (“IRS”) developed a list of 20 factors that may be examined in determining whether an employer-employee relationship exists. The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed; factors other than the listed 20 factors may also be relevant.

The 20 factors identified by the IRS are as follows:

  1. Instructions: If the person for whom the services are performed has the right to require compliance with instructions, this indicates employee status.
  2. Training: Worker training (e.g., by requiring attendance at training sessions) indicates that the person for whom services are performed wants the services performed in a particular manner (which indicates employee status).
  3. Integration: Integration of the worker’s services into the business operations of the person for whom services are performed is an indication of employee status.
  4. Services rendered personally: If the services are required to be performed personally, this is an indication that the person for whom services are performed is interested in the methods used to accomplish the work (which indicates employee status).
  5. Hiring, supervision, and paying assistants: If the person for whom services are performed hires, supervises or pays assistants, this generally indicates employee… However, if the worker hires and supervises others under a contract pursuant to which the worker agrees to provide material and labor and is only responsible for the result, this indicates independent contractor status.
  6. Continuing relationship: A continuing relationship between the worker and the person for whom the services are performed indicates employee status.
  7. Set hours of work: The establishment of set hours for the worker indicates employee status.
  8. Full time required: If the worker must devote substantially full time to the business of the person for whom services are performed, this indicates employee status. An independent contractor is free to work when and for whom he or she chooses.
  9. Doing work on employer’s premises: If the work is performed on the premises of the person for whom the services are performed, this indicates employee status, especially if the work could be done elsewhere.
  10. Order or sequence test: If a worker must perform services in the order or sequence set by the person for whom services are performed, that shows the worker is not free to follow his or her own pattern of work and indicates employee status.
  11. Oral or written reports: A requirement that the worker submits regular reports indicates employee status.
  12. Payment by the hour, week, or month: Payment by the hour, week, or month generally points to employment status; payment by the job or a commission indicates independent contractor status.
  13. Payment of business and/or travelling expenses. If the person for whom the services are performed pays expenses, this indicates employee status. An employer, to control expenses, generally retains the right to direct the worker.
  14. Furnishing tools and materials: The provision of significant tools and materials to the worker indicates employee status.
  15. Significant investment: Investment in facilities used by the worker indicates independent contractor status.
  16. Realization of profit or loss: A worker who can realize a profit or suffer a loss as a result of the services (in addition to profit or loss ordinarily realized by employees) is generally an independent contractor.
  17. Working for more than one firm at a time: If a worker performs more than de minimis services for multiple firms at the same time, that generally indicates independent contractor status.
  18. Making service available to the general public: If a worker makes his or her services available to the public on a regular and consistent basis that indicates independent contractor status.
  19. Right to discharge: The right to discharge a worker is a factor indicating that the worker is an employee.
  20. Right to terminate: If a worker has the right to terminate the relationship with the person for whom services are performed at any time he or she wishes without incurring liability that indicates employee status.

The IRS emphasizes that factors in addition to the 20 factors identified in 1987 may be relevant, that the weight of the factors may vary based on the circumstances, that relevant factors may change over time, and that all facts must be examined.

There is an alternative to the Independent Contractor method of engagement that can simplify the engagement of international workers and remove the risk of misclassification. It’s called Global Employment Outsourcing and while it’s not the right fit for every scenario it is very much worth exploring when deciding how best to engage with workers.

-Eric Snethkamp

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