Worker Classification: Independent Contractor vs. Employee

By Bonnie Bochniak
Vice President, Government Relations
MBPA/MFBA

Oct. 29, 2013 – The Internal Revenue Service (IRS) and the United States Department of Labor (DOL) have recently sent up a flare to warn businesses who try to avoid the Affordable Care Act (ACA) penalties by classifying employees as “independent contractors.” Due to the penalties that are forthcoming in 2015 for businesses with 50 or more full-time employees that do not offer healthcare coverage or offer healthcare that is not affordable, some businesses may consider reclassifying their common law employees as independent contractors.  The IRS and DOL are stating that the scrutiny over worker classification will be very thorough as to make certain those that intentionally reclassify will be penalized.  Since there are more good apples than bad ones, both departments want to also educate business owners on how each classification is defined, to avoid a truly accidental misclassification.|

When classifying workers as employees or independent contractors a fact intensive inquiry must take place in order to properly count the number of employees a business has.  This “count” is very important when calculating for the purposes of the Affordable Care Act, as indicated by the IRS. IRS says businesses must use the traditional common law test for determining employment status. The common law classification rules require that the employer examine 20 factors in determining employment status, and every employee counts.  The factors focus on the degree of control that the employer exercises over the worker’s performance.  Simply put, does the employer have the right to control what work will be done, and how it will be accomplished?

Important factors in analyzing employee status:

1. The worker is required to follow the business owner’s instructions;
2. Any training requirements are imposed upon the workers by a business owner;
3. Work is performed on the business owner’s premises;
4. There is continuing relationship between the worker and the business owner;
5. The worker’s travel expenses are paid by the business owner;
6. The business owner pays for administrative support; and
7. The work-related tools are provided by the business owner.

It is more critical now than ever to make certain business owners know the rules on how to classify their workers.  The penalties for misclassification of workers as independent contractors have always been hefty, but with the additional ACA penalties the stakes are high. Please feel free to contact the MBPA legislative and agent relations team with any questions.  Our association has the tools to help navigate you through the waters of the ACA, we look forward to your feedback.