Employee vs. Independent Contractor

The issue of employee vs. independent contractor is a thorny issue from an IRS perspective.

Although the benefits to employers in using independent contractors are clear, so are the associated risks. Employers should also be aware that the State of Illinois, Department of Employment Security, is equally aggressive in conducting compliance audits, and regularly challenges the employment status of individuals in an effort to increase the State's revenue.

Satisfying the IRS's test of employment status does not necessarily mean an employer will satisfy Illinois's test, or vice versa.

In Illinois, businesses must pass ALL THREE PARTS of the three-part test to correctly classify an individual as and Independent Contractor. These rules are set forth in Section 212 of the Illinois Administrative Code which states:

The services performed by an individual for an employer, whether or not that employer uses others to perform those services is considered employment unless it is proven that:

A. Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact;

AND

B. Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed;

AND

C. Such individual is engaged in an independently established trade, occupation profession, or business.

Lets assume you go through and test of the employment relationship and the company feels the individual is an Independent Contractor. How does the company become subjected to State or Federal scrutiny:

The definition of an Independent Contractor embodies numerous loopholes; government agencies are constantly on the lookout for slip-ups.

How agencies discover Independent Contractors:

• The "I/C" files and Unemployment claim with the Department of Employment Security
• The "I/C" files a discrimination or harassment claim with the Department of Human Rights or the Equal Employment Opportunity Commission
• The "I/C" has a work related injury and files a Workers Compensation with the Illinois Industrial Commission
• The "I/C" is on a long term assignment, becomes disgruntled or jealous and now wants benefits or higher wages. The I/C could file a claim under ERISA or with the Wage and Hour Division of the Department of Labor.
• An "employee" files a grievance or claim with one of the above agencies that triggers an audit.
• What can you do to prevent Independent Contractors from being reclassified as employees and having the corporation subjected to back taxes and potential penalties.
• Don't (Unless you want to indicate employee status)
• Have them complete an application or Immigration Form I-9
• Provide benefits
• Give them a copy of the Employee Handbook
• Allow them to complete the regular time sheet
• Integrate employee and I/C's files

Do

• Keep I/C's files separated from employee files. Set up these files as you would any other vendor's documentation:
• Have them sign "contract for services" specifying the terms and conditions of the relationship.
• Have the I/C invoice the company services performed.
• Maintain a record of insurance certificates, brochures, business cards and other documents
• Request a copy of the I/C's Federal Tax ID #, and Workers Compensation Carrier and Policy #
• Maintain documentation indicating the I/C
• (1)works for multiple organizations
• (2)makes their service available to the public
• (3)solicits their own clientele

The penalties are stiff, so be prepared to justify the organization's classification of workers.