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Numerous federal and state laws cover employers whose workers are deemed to be "employees." Two of the most significant federal statutes are the Internal Revenue Code (IRC) and the Fair Labor Standards Act (FLSA). The IRC obligates employers to pay federal unemployment insurance, Social Security and Medicare taxes on behalf of employees and to withhold income taxes, Social Security and Medicare taxes from employees. There are no such obligations pertaining to independent contractors. The FLSA obligates an employer to pay minimum wages and overtime wages to employees but not to independent contractors. State workers' compensation, wage and hour, and unemployment laws also benefit employees, but not independent contractors. An employer who mistakenly believes that a worker is an independent contractor and not its employee has the potential to incur substantial civil, and possibly criminal, penalties for violations of the IRC, employment and labor laws. For this reason, it is essential to understand who is an employee.

Perhaps your business, whether large or small, should take a fresh look at those workers it classifies as independent contractors to be sure its classification system is accurate. The Internal Revenue Service, in Rev. Rul. 87-41, 1987-1 C.B. 296, has listed 20 factors to be utilized in determining whether a worker is an employee for tax purposes. The issue is the "right to control." As a general rule, if the employer controls not only what is to be done, but also how it's to be done, then the worker is deemed to be an employee and not an independent contractor. If the worker retains a significant level of independence, it is more likely that the worker will be deemed an independent contractor.

• instruction given to the worker
• training provided to the worker
• integration of worker.s services into company.s daily business operations
• services performed by a particular individual
• hiring, supervision and payment by company
• existence of continuing relationship between company and worker
• set hours of work
• full-time services required
• work performed on company premises
• work performed in sequence set by company
• worker reports to company
• compensated by the hour, week or month -- or by task
• business/travel expenses paid by company
• tools/materials furnished by company
• investment in facilities used to perform services
• profit or loss
• work for more than one firm at a time
• workers. services available to general public
• company can discharge worker
• worker can terminate relationship

These factors are designed to be used only as guides. The factors are not to be applied according to a mathematical formula and the importance of each factor will vary depending upon the job and other facts of each situation. If, however, upon a review of these factors, the company has the right to control the worker, an employer-employee relationship exists.

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