Are your workers employees or independent contractors? Are you sure? Misclassification of an employee as an independent contractor could cost your company. If you deliberately misclassify, you could go to prison. This presentation from the Taft Street Law Firm showcases the different totality of the circumstance common law control tests that the IRS, Department of Labor, and State of Florida use to determine whether a worker is an employee or an independent contractor. If you are unsure whether you are following best business practices, contact a Virtual Corporate Counsel℠ at Taft Street. http://toplawfirmflorida.com/florida-small-business-lawyer-virtual-corporate-counsel.html

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2. — Charles J. Esposito, Esq.
Taft Street Law Firm
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3. The IRS, DOL, and State of Florida
all have their own totality of the
circumstances tests for determining
if a worker is an employee or
independent contractor.
Each test looks to the degree of
control the employer has in the
business relationship.
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4. Common Law Rules
3 Categories
1. Behavioral: Does the company control or have the right to control what the
worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer?
(these include things like how worker is paid, whether expenses are
reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e.
pension plan, insurance, vacation pay, etc.)? Will the relationship continue and
is the work performed a key aspect of the business?
IRS

5. Common Law Rules
20 Factors
• Businesses must weigh all these factors
• Some factors may indicate that the worker is
an employee, while other factors indicate that
the worker is an independent contractor
• There is no “magic” or set number of factors
that “makes” the worker an employee or an
independent contractor
• No one factor stands alone in making this
determination
• Factors which are relevant in one situation may
not be relevant in another
IRS
The Keys
• Look at the entire relationship
• Consider the degree or extent of the right
to direct and control
• Document each of the factors used in
coming up with the determination

6. A worker who is required to
comply with other persons'
instructions about when, where,
and how he or she is to work is
ordinarily an employee.
Training a worker by requiring an
experienced employee to work with the
worker, by corresponding with the
worker, by requiring the worker to attend
meetings, or by using other methods,
indicates that the employer is directing
the work.
Integration of the worker's
services into the business
operations generally shows that
the worker is subject to direction
and control. Does the business
rely on these services?
IRS
Factors
1-5
6
If the employer insists that services
must be rendered by the worker,
presumably the employer is asserting
control over the worker.
If the employer hires, supervises, and pays
assistants, that factor generally shows control
over the workers on the job. If the worker hires,
fires, and supervises, then this factor indicates
independent contractor status.

7. A continuous relationship between an
employer and a worker indicates a
possible employment relationship.
However, an independent contractor
arrangement can involve an ongoing
relationship for multiple, sequential
projects. (see US v. Silk)
The establishment of set hours of work
by the employer is a factor indicating
control over the worker.
Full time work gives the employer
control over the worker’s time. An
independent contractor, on the other
hand, is free to work when and for
whom he or she chooses.
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If the work is performed on the premises of the
employer, that factor suggests control over the
worker, especially if the work could be done
elsewhere. Telecommuting and traveling, however,
do not automatically indicate contractor status.
If a worker must perform services in the order or
sequence set by the employer, that factor shows that
the worker is not free to follow the worker's own
pattern of work. It is sufficient to show the employer
retains this right if they have not exercised it.
IRS
Factors
6-10

8. A requirement that the worker submit
regular or written reports to the
employer indicates a degree of control.
Generally points to an employer-employee relationship,
provided that this method of payment is not just a
convenient way of paying a lump sum agreed upon as
the cost of a job. Payment made by the job or on a
straight commission generally indicates that the worker
is an independent contractor.
The fact that the employer furnishes
significant tools, materials, and other
equipment tends to show the
existence of an employer-employee
relationship. 8
If the employer pays and the controls
the worker's business and/or traveling
expenses, the worker is ordinarily an
employee.
Independent contractors invest
in their own facilities. Employees
rely on employer investment in
facilities.
IRS
Factors
11-15

9. A worker who can realize a profit or suffer a loss
as a result of the worker's services (in addition to
the profit or loss ordinarily realized by employees)
is generally an independent contractor, but the
worker who cannot is an employee.
If a worker performs more than de minimis services for a
multiple of unrelated persons or firms at the same time, that
factor generally indicates that the worker is an independent
contractor. However, a worker can be an employee of
multiple employers.
The right to discharge a worker is a
factor indicating that the worker is an
employee and the person possessing
the right is an employer. An
employer exercises control through
the threat of dismissal.
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The fact that a worker makes his or
her services available to the general
public on a regular and consistent
basis indicates an independent
contractor relationship.
If the worker has the right to end
his or her relationship with the
employer at any time he or she
wishes without incurring liability,
that factor indicates an
employer-employee relationship.
IRS
Factors
16-20

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IRS Common Law Rules
20 Factors
1 2 3 4 5
6 9 107 8
11 12 13 14 15
16 17 18 19 20

11. Economic Reality Test
Fair Labor Standards Act
• In order for the FLSA’s minimum wage and overtime provisions to apply to a
worker, the worker must be an “employee” of the employer
• The FLSA defines “employ” as including to “suffer or permit to work”
• Broad definition
• Workers who are economically dependent on the business of the employer,
regardless of skill level, are considered to be employees, and most workers are
employees.
• Independent contractors are workers with economic independence who are in
business for themselves.
DOL

12. Economic Reality Test
6 Factors
• “Economic realities” factors are helpful guides in resolving whether a worker is
truly in business for himself or herself.
• Employers can require (or allow) employees to work and who can prevent
employees from working.
• The Supreme Court has indicated that there is no single rule or test for
determining whether an individual is an employee or independent contractor
for purposes of the FLSA.
• The Court has held that the totality of the working relationship is determinative,
meaning that all facts relevant to the relationship between the worker and the
employer must be considered.
DOL

13. If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is
economically dependent on the employer and less likely that the worker is in business for himself or herself. For
example, work is integral to the employer’s business if it is a part of its production process or if it is a service that the
employer is in business to provide.
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DOL
Factors
1-3
Managerial skill may be indicated by the hiring and supervision of workers or by investment in equipment. Analysis of
this factor should focus on whether the worker exercises managerial skills and, if so, whether those skills affect that
worker’s opportunity for both profit and loss.
The worker must make some investment compared to the employer’s investment (and bear some risk for a loss) in order for there to
be an indication that he/she is an independent contractor in business for himself or herself. A worker’s investment in tools and
equipment to perform the work does not necessarily indicate independent contractor status, because such tools and equipment may
simply be required to perform the work for the employer. If a worker’s business investment compares favorably enough to the
employer’s that they appear to be sharing risk of loss, this factor indicates that the worker may be an independent contractor.

14. Both employees and independent contractors may be skilled workers. To indicate possible independent contractor
status, the worker’s skills should demonstrate that he or she exercises independent business judgment. Further, the
fact that a worker is in open market competition with others would suggest independent contractor status.
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DOL
Factors
4-6
Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee,
as opposed to an independent contractor. However, a worker’s lack of a permanent relationship with the employer
does not necessarily suggest independent contractor status because the impermanent relationship may be due to
industry-specific factors, or the fact that an employer routinely uses staffing agencies.
Analysis of this factor includes who sets pay amounts and work hours and who determines how the work is performed,
as well as whether the worker is free to work for others and hire helpers. An independent contractor generally works
free from control by the employer (or anyone else, including the employer’s clients). This is a complex factor that
warrants careful review because both employees and independent contractors can have work situations that include
minimal control by the employer. However, this factor does not hold any greater weight than the other factors.

15. Florida Control Test
10 Common Law Factors
• Chapter 443, Florida Statutes, governs whether services performed constitute
employment subject to the Florida Reemployment Assistance Program Law.
• This law provides that employment includes service performed by individuals
under the usual common law rules applicable in determining an employer-
employee relationship.
• The common law rules look primarily at the following 10 factors of the working
relationship to determine if the worker is an employee or an independent
contractor.
FL

16. • If the employer retains the right to dictate how the work should be done, the worker is an employee.
• If the employer decides what work the worker will do and how the worker will do it, then the worker is
an employee.
• When an employer hires an independent contractor, the employer is normally interested only in the
end result, not the details of how the contractor performs the work.
• An independent contractor is not subject to the will and control of the employer.
• The employer can decide what results are expected from the independent contractor, but cannot
control the methods used to accomplish those results.
• This factor is the most important of the 10 determining factors.
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FLORIDA
Factor
1

17. A person engaged in a distinct occupation or business is more likely to be an independent contractor if the occupation
or business is separate and distinct from the employer's business.
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FLORIDA
Factors
2-4
If the work is usually done in that locality under the direction of an employer, then the worker is more likely to be an
employee. If the work in that locality is usually done by a specialist without supervision, then the worker is more likely
to be an independent contractor.
The greater the skill required for the occupation, the more likely the worker is an independent contractor. A contract
for labor only will normally be considered a contract of employment while the hiring of a licensed professional is more
likely to be considered the hiring of an independent contractor.

18. Independent contractors are generally expected to provide or purchase everything they need to do the job.
Employees are not expected to provide their own workplace, materials, tools, and supplies, or to otherwise invest their
own money in the business.
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FLORIDA
Factors
5-7
The more long-term, continuous, and exclusive the relationship is, the more likely it is to be employment.
Independent contractors generally perform their work one job at a time and are paid by the job. An
employee is paid for his time.

19. If there is a written agreement between the parties describing the relationship it should be honored unless other
provisions of the agreement, or the actual practice of the parties, show that the agreement is not a valid description of
the working relationship. If the actual practice of the parties shows an employee relationship, an agreement which
describes the worker as an independent contractor will be disregarded. How the worker is treated, not the language of
a written agreement or the issuance of a 1099, determines whether the worker is an employee or an independent
contractor.
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FLORIDA
Factors
8-10
If the hiring party is a business, it is more likely that the worker is an employee. If the hiring party is an
individual, the worker is more likely to be an independent contractor.
If the service provided by the worker is an integral part of the service the employer provides to the public, the worker
is more likely to be an employee. If certain services are so essential to a business that it will succeed or fail based upon
how well those services are performed, the business will often want to exercise enough control over the services to
ensure they are good. That can make a business the employer of such workers.

20. That’s who cares.
Who
Cares?

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Misclassification Leads to Liability
Wage and Hour
Employment Tax
Employee Benefits
Worker’s Compensation

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EXTENSIVE
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IRS
• $50 each missing W2
• 100% of Unpaid Employer FICA Taxes
• 40% of FICA Taxes Not Withheld
• 1.5% of Wages Penalty
• .5% of Unpaid Monthly Tax
Criminal Penalties For Intentional Misclassification
• $1000 Each Misclassified Worker
• 1 Year in Prison
• Potential for Personal Liability

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PROACTION
How Can Your Company
Protect Itself?
Virtual Corporate CounselSM
Best HR Practices
Informed Contractor Contract Drafting
Risk Management
Proper Insurance

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CONTRACT
Be explicit in defining contractor relationship
TOOLS AND MATERIALS
Don’t provide them
COMPENSATION
Pay by the job, not by time periods
RESULTS
Focus on results of the work, not the process
CONTROL
Allow contractors freedom, after all they have to
honor your contractual agreement
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26. Worker misclassifications are costly, but avoidable
Review and assess your worker classifications
Implement changes to your hiring and employment
practices to manage risk
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27. “
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— Gary Cohn
If you don’t invest in risk management,
it doesn’t matter what business you’re in,
it’s a risky business.

28. Vir tual Corp orate CounselS M
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