If It Walks Like an Employee...

By Sandy LeDuc
LeDuc and Sikowitz

With the economy inching along we hear more frequently about the need to hire. Vacillating enthusiasm and confidence make flexibility important in case the recovery doesn't actually have legs under it. Discussion invariably leads to the age old debate over hiring an employee or a contractor.

Doesn't everyone know a business that hires people to work full time as contractors to sit side by side with others doing similar or identical work? Contrary to popular opinion this is not a matter of choice and convenience but one of interpretation based on well established guidelines.

The contractor relationship can work well for both parties, however, abuse of the contractor category has forced the IRS to work hard at continually clarifying such relationships. Employment relationships net the IRS more in tax revenue making them highly motivated. Over the years certain industries perceived to have stretched the definition of contractor just a bit too far have attracted the attention of the IRS and inspired regulations forcing certain workers into the category of employee.

Without benefit of such rulings, the differentiation between these two classes of human resources boil down to the interplay of three elements of control and intention:

• Behavioral Control-a company has hired an employee when management has the right to direct or control how, where and when work will be done whether they do so or not. In a contractor relationship the worker might only be directed as to results with the worker making choices about the how, where and when of the work.
• Financial Control-a contractor is perceived to be in business to make a profit. There is likely an investment in this business. Some or all of the contractor's expenses may go unreimbursed. The contractor has an opportunity for profit and a risk of loss.
• Relationship-the worker and company will no doubt adopt certain elements of their relationship that will be used to determine the nature of the relationship. For instance, paid holidays and other benefits will point to an employment relationship.

Careful planning including the execution of a contract may be a good method of laying out the relationship between two parties. A carefully crafted contract should be able to spell out the elements of control and relationship so that there will be no surprises under IRS scrutiny.

Winter 2004 -Volume 14, Number 1

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