How do we differentiate an employee from an independent contractor?
With Affordable Care Act requirements becoming a reality the importance of how a worker is defined as an employee or independent contractor is vital. The responsibilities that come with having employees is federal and state tax withholding, anti-discrimination, health care, pension, worker’s compensation and unemployment insurance. By categorizing them as independent contractors employers can legally avoid these responsibilities. But, we must be sure that this worker is definitely an independent contractor instead of an employee. The IRS has outlined how one should categorize an independent contractor in JCX-26-07. Here workers are defined as an employee instead of an independent contract for reasons such as payment structure, training and maintaining a continuing relationship.
Today, mobile apps such as Uber and Lyft that have sprung up with blazing popularity have based their business models on workers as independent contractors and are together valued at over 18 billion dollars. However, the weight of the penalty for workers being misclassified and the resulting change in employer responsibility is also enormous. In combination with government agencies publicizing an increased willingness to take action you can find yourself in a volatile situation if you do not adhere to the worker classification guidelines.
Tax specialist Robert Wood writes on this issue in Forbes and he notes that the Affordable Care Act has raised the already high stakes even higher for misidentifying independent contractors. That’s because the federal mandate segment of the Affordable Care Act requires employers to offer employee coverage for full-time employees—among other factors.
The tax specialist also mentions that independent contractors who are under contract and accept their pay can still sue and win against their payer. We saw exactly this happen in 2014 with FedEx Ground delivery drivers and again with Domino’s pizza drivers. At the end of the day the courts will uphold the details of a worker-employer relationship above that of a title or contract. Be sure to read all of the guidelines in JCX-26-07.