Are You Misclassifying Your Workers as Independent Contractors?

By: Lindsey Harrison, Esq.

Classifying workers as either employees or independent contractors is not always easy. Simply labeling a worker as an independent contractor does not in itself establish the actual status of that worker in relation to the employer. The consequences of a misclassification can be disastrous to employers, resulting in government fines, back taxes, unpaid benefits, and the obligation to pay minimum and overtime wages. With the rise of the sharing economy and increased use of independent contractors, the Georgia Department of Labor is cracking down on companies that misclassify their workers.

If your business utilizes independent contractors, it is important to review that relationship from time to time to make sure that you could withstand an audit by the Georgia Department of Labor of your worker classifications.

In Georgia, for a worker to qualify as an independent contractor, the employer must demonstrate that the worker:

  1. Has been and will continue to be free from control or direction over the performance of his or her work; and

  2. Is customarily engaged in an independently established trade, occupation, profession, or business.

The following factors are relevant in determining whether a worker is free from control or direction over the performance of his or her work:

  1. Whether the company places any territorial or geographic restrictions on the worker;

  2. Whether the worker provides his or her own equipment;

  3. Whether the worker is required to work a minimum amount of hours;

  4. Whether the worker can set his or her own hours;

  5. Whether the worker can accept or reject work without consequence;

  6. Whether the worker is able to set his or her own schedule;

The bottom line is that the more control that a company exercises over its workers, the more likely it is that those workers will qualify as employees.

In order to satisfy the second prong of the test, the employer must demonstrate that the worker is customarily engaged in an independently established trade, occupation, profession or business. While you may not be required to demonstrate that a worker is necessarily providing services for another company, it is important to establish that he or she could work for another company. Examples would include situations where a worker has another full-time occupation, where the worker has express permission to sell a competitor’s products, and where a worker has an independent business card and advertises its services separately from those of the company.

In the alternative, an employer can establish independent contractor status by showing that the IRS has found that the worker is not an employee through an SS-8 determination from the IRS prior to a Georgia Department of Labor investigation. However, obtaining an IRS determination is not routine, so most Georgia employers have to satisfy the above two factor test.

The IRS utilizes a twenty factor test to determine whether a worker is an employee or an independent contractor for purposes of reaching an SS-8 determination. The twenty factors are as follows:

  1. Whether the company provides instructions about when, where or how the work is to be performed;

  2. Whether the company provides training to the worker;

  3. Whether the success of the company depends upon the performance of the worker’s services;

  4. Whether the services performed by the worker must be rendered personally;

  5. Whether the person for whom the services are performed hires, supervises and pays the worker;

  6. Whether there is a continuing relationship between the worker and the company;

  7. Whether the company sets the worker’s schedule or has hourly requirements;

  8. Whether full-time hours are required;

  9. Whether the work is performed on the company’s premises;

  10. Whether the company sets the order or sequence of the work to be performed;

  11. Whether the worker is required to submit oral or written reports;

  12. Whether the worker is paid per job or by the hour, week or month;

  13. Whether the company covers business or travel expenses;

  14. Whether the company furnishes necessary tools and materials;

  15. Whether there is a significant investment made by the worker;

  16. Whether the worker can realize a profit or loss as a result of his or her services;

  17. Whether the worker can work for more than one company at a time;

  18. Whether the worker’s services are also made available to the general public;

  19. Whether the company has the right to discharge the worker; and

  20. Whether the worker has the right to terminate the relationship without incurring liability.

The bottom line is that if your business utilizes independent contractors as part of its workforce, it is vital that you take action, if needed, to ensure that the relationship can withstand a Georgia Department of Labor audit. While a well drafted independent contractor agreement can assist with this, it also important to continue to monitor the relationship to make sure it does not inadvertently turn into an employer/employee relationship.

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