More than ever, employers struggle with employee classification issues: are workers employees or independent contractors? And now, the State of Minnesota and the IRS have started a new initiative to more aggressively audit employers about employee classification, so an improper classification can have significant consequences in the form of increased taxes, penalties and fees.
Employers often mistakenly believe that the label they attach to a worker is controlling, but the IRS and courts ignore employer labels when evaluating a worker’s status.
Unfortunately, different agencies (e.g. IRS, the Minnesota Department of Economic Development and workers’ compensation, US Department of Labor, and the courts) use slightly different test to determine independent contractor status, and there is no effective short-hand analysis, which leads to a higher likelihood of employer confusion (and litigation) over this issue.
To illustrate, I couldn’t pass this case up, which highlights the classification problem. We lawyers often talk about whether a case passes the “smell test,” before we engage in a legal analysis. Well, the case, St. Croix Sensory, Inc. v. Department of Employment and Economic Development, No. A09-1627 (Minn. Ct. App. 2010), relates to whether “sensory assessors” (whose job is to actually test odors) were independent contractors or employees.
In the “Smell Test” case, the court evaluated a totality of circumstances test to determine whether the status of the worker: (1) the right to control means and manner of performance; (2) mode of payment; (3) furnishing of material or tools; (4) control of the premises where the work is done; and (5) the right of the employer to discharge the employee, and a number of other factors. The IRS typically looks at those factors, and whether: the worker hires assistants; the employer trains the worker; the worker has services available to others; the work performed is essential to the business operation; and whether the worker incurs expenses and risk of loss. Obviously, it is difficult to summarize these determinations, when so many factors are at play.
Though there is no simple formula to determine whether workers are employees or independent contractors, the control of the means and manner of work is often the most important factor. That said, as the “Smell Test” case held, when an employer allows a worker to perform the task in the manner of their choosing, but within set parameters that are based on client expectations or industry standards, the worker may still be an independent contractor.
That is the biggest take-away for employers from the St. Croix Sensory, Inc. case—even where it appears that the employer may have a great deal of control over the work, the type of control matters. Contact Attorney Wiley to evaluate your classification issues.