SUB CATEGORIES OF Talent

What's Up Wednesday 6-21-2017

Employee or Contractor

As a startup, you need to accurately separate legitimate employees and independent contractors because, if these classifications need to be justified, governmental agencies won't give you the benefit of the doubt. In addition, there can be questions of legal liability should a service provider be injured. Your insurance should cover employees (while it won't typically apply to contractors); if a court rules that an injured contractor was truly an employee, your startup (or you and your fellow founders) will face the liability.

The tech company’s designation as “employee” or “independent contractor” is not controlling. All the facts and circumstances are considered by governmental authorities when determining whether an individual is properly classified as an employee or independent contractor and there is no bright-line rule that tech companies may follow in making such determination. The general rule is that service providers are employees unless a tech company can prove otherwise.

It is important that individuals are properly classified as either employees or independent contractors. If service providers are misclassified, the consequences can be significant.

Under the common law test, an individual is an employee of the other person if the person retains the right to control not only the results to be obtained from services but also the manner and means by which the results are to be accomplished. The IRS followed a 20-factor test for years when determining employment classification, but changed its methodology in 1996. The new IRS methodology in effect simply groups the 20 factors into three subgroupings and many practitioners still use the 20-factor test. These are the 20 factors.

  • Instructions;
  • Training;
  • Integration;
  • Services rendered personally;
  • Hiring, supervising and paying assistants;
  • Continuing relationship;
  • Set hours of work;
  • Full time required;
  • Doing work on employer’s premises;
  • Order or sequence set;
  • Oral or written reports;
  • Payment by hourly weekend or month;
  • Payment of business or traveling expenses;
  • Furnishing of tools and materials;
  • Significant investment;
  • Realization of profit or loss;
  • Working for more than one company at same time;
  • Making service available to general;
  • Right to discharge; and
  • Right to terminate.

The IRS’s goal with these factors is to determine if the tech company had a right to exert control even if the tech company actually did not exert control. Courts have not always been consistent in weighing these 20 factors, so the relative weight is always subject to some uncertainty.