As the pandemic drags on, many folks continue to work remotely from home. In fact, a number of commentators have predicted that the everyday workplace paradigms have shifted, with the result being that the normal five day a week commute to work in an office has become a thing of the past for many.

Their expectation is that some form of hybrid schedule involving a combination of remote working and in office presence will become the post-pandemic norm.

Although there has always been a certain tension between who should be classified as an independent contractor, and who should be classified as an employee, the increase in remote workers is likely to exacerbate the problem resulting in a greater number of Department of Labor audits by the respective states as they focus on the issue.

Why Is This An Important Issue And How Does It Arise?

Employees are subject to income and payroll tax withholding. Independent contractors are not. Furthermore, having an employee working remotely in a state may give rise to income tax nexus, whereas using an independent contractor may not.

In the great majority of cases, employee/independent contractor audits arise as a result of an individual’s application for unemployment benefits. In my experience, the normal trigger for an audit is an unemployment claim filed by a person who was purportedly an independent contractor who decides to file for benefits as if they were an employee. The subject individual may have even signed an agreement acknowledging that they were not an employee, but when the job they were working on ends, all bets are off and they look for any benefits that may be available.

Who Is An Employee and Who Is An Independent Contractor?

The various states have their own testing criteria, but they all revolve around several basic themes. First, what is the degree of control the company has over the individual? Does the company tell the individual what hours to work, and how to perform the job? An independent contractor generally makes his or her own hours and decides exactly how to do the job. This Week in Tax August 27, 2021 Your livelihood, empowered.

Second, who bears the risk of loss or stands to gain with respect to the job? An employee works for an employer that bears any burdens and benefits from any rewards. An independent contractor bids for a job, agrees on a price, and moves forward winning or losing depending on how effectively and efficiently the job is performed.

Third, is the work being performed similar to the core work being performed by the company? For example, if the company designs websites, and the individual at issue also designs websites, it is more likely that the person will be deemed an employee than if he was a plumbing contractor.

Fourth, does the individual offer similar services to other companies? If a person performs services exclusively for one company, it is more likely that she will be found to be an employee than an independent contractor. A true independent contractor holds themselves out to the general public as being available to contract for any number of jobs.

Finally, does the purported independent contractor operate through an entity or not? Most independent contractors operate their businesses in a manner as to limit any potential liability they may become subject to. If an entity is not involved, it makes it easier for a state to conclude the individual is an employee rather than an independent contractor. While there are a number of other criteria that the states sometimes look to, the ones set forth above often are a critical part of the respective states’ decision matrixes.

Don’t Get Caught In The Trap

While the states have always focused on the independent contractor/employee issue, the pandemic is likely to intensify their glare given the increase in remote workers. Carefully analyzing the characteristics of a company’s workforce can help prevent some very costly assessments in the future. Companies that fail to do so operate at their own peril.

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By: Tom Corrie, JD, LL.M., Principal, State and Local Tax Co-Leader

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