Employee v Independent Contractor Test

[gwheelock915]

Hi everyone,

a little about myself as I am new here. The last few years have been tumultuous with losing a career and finding really menial work. I was able to find work as an "independent contractor" working as a courier delivering medicine to medical facilities. This work in no way cuts it, but for now it'll have to do.

Here's the scoop.

I'm paid a 'commission,' which was set by the company;
I have to wear the appointed uniform;
I have to use and lease their equipment;
I have to use my own vehicle, insured to their terms;
I have to pay for all of my own expenses, gas, tolls, etc.;
I am not allowed to have someone substitute for me unless they are a driver for the company;
I have to work their schedule M-Sa, and put in a 'request for time off' should I need off;
I drive the same route each day. They require me to be ready at the pharmacy at a certain time each day. The pharmacy is never ready, so I don't receive overtime.
I am required to follow a route prescibed by them;
I am required to make my deliveries at a certain time;
The company has volumes of policies and procedures that I must follow.

I have read information from the IRS, but by no means am I fan of reading their publications. I understand I can file an SS-8, but I would only consider doing so if I had something else lined up.

The pharmacy, up until recently had their own driver-employees and fleet of vehicles doing the same exact work.

So at the end, the pharmacy, and the logistics company I 'contract' with control all aspects of my day.

Can someone break down the relationship test and tell me in simple terms what it is, and how the outcome of the test is determined.

And lastly, do I stand to benefit in any way from an SS-8 filing? If so how? Why or why not?

Thanks in advance.

[vangogh]

Welcome to the forum. I'm by no means an expert when it comes to the IRS or their various forms. Please take everything I say with a grain of salt. I mostly want to make sure you get some replies to your questions.

I looked up form SS-8 and if I'm understanding right it's something the company would fill out and not you. It's for them to determine whether or not you're an employee or contractor in order for them to determine if they need be responsible for your taxes. If I'm understanding you correctly it sounds like the company is considering you an independent contractor, though based on your description it does sound as if they treat you much like an employee.

This is going off memory from years ago, but I think for you to be considered an independent contractor you're supposed to work with your own equipment and be doing similar work for other companies or at least be capable and trying to do similar work for other companies. If all your work is for this one company and you're using their equipment, I would think the IRS would consider you an employee even if you're not technically called one by the company.

There's probably also tests as to how much work you've done. If you've made less than a certain amount over the year or if the work isn't on a regular schedule the IRS might then see you as an independent contractor.

Again this isn't my area of expertise and I'm going off memory so please don't take anything I say as the absolute truth.

[Steve B]

Hi,

This was one of my areas when I was in Human Resources. It indeed sounds like you are legally an employee and not an indepedent contractor. However, I don't think you have much to gain by challenging their classification. The only way I can see you benefiting is if you were missing out on some great benefits that they only give to employees (Google this topic as it relates to Microsoft). Some people were doing the same jobs right next to each other for years. Some were classified as "employees" and some were "independent contractors" - I think it depended on when they were hired. Some of these "employees" became millionaires when the company went public. It's an interesting read.

Regardless, most of us don't have so much to gain as these Microsoft contractors, so I'm not sure what you would gain by a challenge.

Regarding the "test". I believe there are 12 things that are considered in these cases. A judge (or jury - not sure which applies) will look at these 12 points to help them determine which classification is appropriate. The company may "fail" one, or two, or three or more of these points, but still be correct in classifying someone as a "contractor". There is no magic number - it's more like a scale. If more things (and they may not be weighted equally) tip the balance to one side or the other - that should be the decision. Different judges (or juries) could easily look at the same set of facts and come up with differrent decisions.

[Business Attorney]

I wrote an article Independent Contractor or Employee? (http://www.illinoisbusinessattorney.com/articles/independent_contractor_vs_employee.html). It's a couple of years old but nothing has really changed.

The IRS used to apply a 20 factor test but people often misinterpreted it to be a simple numerical test: count up the factors and whichever has more in its column is how your status is characterized.

The 20 factors were never intended to be used that way, so the IRS now avoids numbering them, but rather groups them as I discuss in my article. In the end, no one set of factors controls the determination of your status.

From the description you have given, it sounds likely that your status is more like that of an employee rather than an independent contractor, but of course we have only seen your description, not that of your employer. They may have arguments that you don't recognize.

The primary advantage of changing a person's status is that it shifts the obligation of paying the employer portion of payroll taxes from the independent contractor to the employer. In a sense, it is really unfair to do so retroactively because the compensation was set at a rate that assumed that the independent contractor would be bearing those costs. If an employer was paying $11 an hour to an independent contractor, he might have only paid $10.15 an hour to an employee. Going forward, the employer can adjust his compensation but it is probably unlikely that he can recover the excess from the individual if he gets socked with the back payroll taxes.

Another advantage of changing the status is that employees are covered by minimum wage laws and other wage and hours laws. A company doesn't have to make sure that independent contractors earn a minimum wage or that their compensation for working more than 40 hours in a week includes an overtime rate. If your status for state law purposes is an employee, you can require that the employer comply - even retroactively - with all wage laws protecting employees.

[Simplyme]

Steve, maybe you can help me, too. I am unemployed and getting desperate for some income. I recently called a number on a sign (not one of those roadside signs, but right in front of the hiring business's office) for a sales job. The owner puts on bicycle races, and was looking for someone to sell sponsorships and ad space in event programs. I looked up the company online and it is legitimate. The trouble is, I feel like I'm being pressured to do a few weeks trial period as an "independent contractor" (the owner's words) to "see if I'm going to work out"--this, after being praised to the skies for my poise and professionalism. I have repeatedly stated that I want to work for him longterm only for some kind of draw as an employee. This whole thing just feels hinky to me. I think he's trying to get something for nothing, and he is being very pushy and saying things like, "You know, you have nothing to lose here." I'd love to hear your thoughts and anyone else's who might want to comment! Thanks!

[vangogh]

It's possible you may have to go the independent contractor route for a few weeks. Unfortunately it's a seller's market right now when it comes to jobs. With so many people out of work any employer will likely have enough people applying that they can set whatever terms they want. Even though you want full time work, why not take things as a contractor for the few weeks. At the very least it's an opportunity to make some money. The worst case is you're where you are right now. You can still look for other jobs while you contract too.

[nealrm]

If you really need the work, I might accept the offer. However, this person is not a long term option. Hiring someone in on a trial period as an independent contractor most likely translates to "I need someone short term and I don't want the hassle of setting up payroll taxes" It also hints at a less than positive attitude toward employees. However, it may bring in some short term money.

[Business Attorney]

I'll throw in a contrary view here. I have a number of clients who have hired salesmen who had great promise but turned out to be complete duds. That makes them really reluctant to hire someone.

If there is a really long sales cycle and a lot of time spent building relationship, then a trial run as a commission-only independent contractor may not make sense. Selling sponsorships and ad space in event programs, however, sounds like it would be a short sales cycle and require minimal training about the product (bike races). If a person can make the sales, he proves his value to the company. If he comes up short, then he was probably missing either the skills or the drive needed to fill the job.

I don't see this is as the company taking advantage of the individual but simply a decision about who is going to take the risk that the individual cannot perform the job. In an employment relationship, the risk is on the employer since he will have to pay wages until the employee is fired or quits, even if he misrepresented his skills or was not a hard worker. In an independent contractor relationship with no draw or base, the risk is on the individual since he will receive nothing for his effort unless he has results to show for it. Neither way is wrong or unfair as long as both parties understand the deal.

[vangogh]

Yeah, I don't see it as a company trying to take advantage of individuals either. I think both sides always want to minimize their risk. As employees we always want the guarantee and employers often hire people on a 90 day trial period. Right now there are more people looking for jobs than jobs to fill so employers can do more to minimize their risk while employees need to accept more of it. If things were reverse employers would have to offer more guarantees.

[nealrm]

I don't really see any difference in risk between the two options. If they were truly worried about risk, they would extend the interviewing process to make sure he fit in well with the company. There is also the question of why they are pressuring him to take the job, yet keeping him an IC. I would ask some more questions, like "why did the previous employee leave", "How long did the previous employee have the position", "What is the companies turn over rate in sales".

[billbenson]

I agree with David and Steve. Sales requires product knowledge, a good fit with management and customers, being able to take your boss to a meeting to close the deal if necessary, sales skills, how aggressive he is (that's not always a good skill in sales BTW), etc.

The best salesman in the country for a beer distributor may, and probably will suck at selling fork lifts.

Salesmen are driven by money for the most part. And the company hiring the salesman wants more business. As a contractor, you may come in and do well right away but feel you could do better with a different company. As an sales manager, you may feel the contractor is great or not a good fit.

I think starting out as a contractor is the best of both worlds.

[penciltester]

i'm in the same boat. Independent driver for a pharmacy...well in a few weeks at least. how is the pay?