CLASSIFYING EMPLOYEE (W-2) vs. INDEPENDENT CONTRACTOR STATUS (1099)
Determining whether a worker is an employee (W-2) or independent contractor (1099 employee) can be complicated. The complexity is compounded because different laws and agencies apply varying tests to make this determination. For example, the IRS and Illinois Department of Employment Security rely on differing factors to determine who is an independent contractor vs. employee. Similarly, Title VII of the Civil Rights Act applies a standard that is different from both. Other laws also choose different or a combination of the same factors.
It is important to note that the contract signed between the employer and employee does not control this determination. In many cases, the law and governmental agency will disregard the contract and focuses on the elements of the relationship between the two parties. The determination generally focuses on control and the economic realities of the relationship between the worker and employer. The more control the employer has over the worker or the economic relationship, the more likely it is that the worker will be deemed an employee instead of an independent contractor. The following is a list of factors that are weighed in making this determination. These factors are analyzed jointly in an attempt to reach a conclusion whether the worker is in fact an independent contractor or employee.
FACTORS USED TO DETERMINE INDEPENDENT CONTRACTOR STATUS
- Type of employer's business
- Employer's right to control the details of the work
- The extent of training given by employer to worker
- Employer's right to supervise employee
- Method of compensation (hourly vs. by project)
- Skill level required
- Length of arrangement (permanency)
- Whether worker is employed by more than one employer
- Whether worker's work is part of the employer's normal business
- The extent of the worker's investment in the tools and equipment used
- Whether employer or worker provides the tools and work equipment
- The intention of the parties
- Any written agreements between the parties
- Whether employer provides worker any benefits
- The extent to which the worker has unreimbursed expenses
- Level of risk taken by worker
Classifying a worker incorrectly can have significant financial consequences under the law and with governmental agencies. Sometimes, fines, penalties and taxes are imposed as a result of improper classifications which often involve multiple workers. Given the complexity of the laws in this area, the differing legal definitions, and the possible financial exposure, it is important to consult an experienced employment attorney to provide guidance in this area. Our employment attorneys are experienced in matters of analyzing employment status and can assist businesses in this regard.