Employee classification refers to the way that a worker is considered for tax purposes. Different employee classifications impart different responsibilities on the employer in the fields of healthcare, workers comp, and taxation.
An employee is a permanent worker who has exclusive obligations to the employer. By contrast, an independent contractor is usually self-employed and sells their services to an individual or company to perform specific tasks.
The IRS calculates the relationship between an employee and employee by collecting evidence based on three categories of control: behavioral control, financial control, and relational control. Behavioral control refers to whether or not the business has a right to direct and control what work is accomplished and how the work is done. If the business controls the behavior, it is more likely that the individual is an employer rather than an independent contractor.
Financial control refers to the ability of a business to control the financial aspects of an employee’s job. This refers to factors such as how many unreimbursed business expenses an employee incurs. Independent contractors generally have more unreimbursed expenses than an employee.
Relational control refers to the nature of the employer-employee relationship. Evidence of relational control includes contracts demanding exclusivity or permanence, the extent to which the worker performs key aspects of the business’ function.
If an employer misclassified employees as independent contractors, then they could be found liable for failing to pay employee income taxes, provide healthcare benefits, or pay worker’s compensation. This could require payment of fines as well as compensation for back taxes and unpaid benefits.
In order to ensure that workers are properly classified as either an independent contractor or employee, an employment law attorney should be consulted. An experienced employment law attorney can examine the worker’s relational, financial, and behavioral control exercised in order to determine the proper compliance and employee classification