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Article # 0070

Maintaining Independent Contractor Status

by

R.L. Langley, P.E.

Introduction

Many professionals engaged in engineering or other specialty practices wish to maintain an independent (consultant) contractor status for various reasons. However, this can be a challenge in today’s working world because of the application of government indicators or “tests” that determine whether one is functioning as an independent contractor (“contractor”) vs.an employee.

Scope

The scope of this paper is to identify actions one can take in navigating through potential challenges of maintaining the independent contractor status. However, each situation is different. The information presented here is based only on the author’s own knowledge and experience. Therefore, one should consult a qualified employee law attorney, his/her tax advisor or other qualified counsel for guidance on his/her particular work situation.

The purpose of this writing is not to discuss the advantages or disadvantages of being independent contractor vs an employee, as the assumption is that decision has been made in favor of the former. However, it’s usually worthwhile endeavor for any individual contemplating independent contractor vs employee status to thoroughly investigate the advantages and disadvantages of each (both fiscally and otherwise) before making the decision. Fortunately, there’s much available research information on the subject.

Background

Oddly enough, tax laws prevent the IRS from defining the term “independent contractor”. However, the Internal Revenue Service (IRS), the U.S. Department of Labor, the Fair Labor Standards Act (FLSA), and several state labor regulatory agencies provide guidance “tests” regarding the factors that can determine whether one is working as an independent contractor or an employee.

For purposes of this paper, mainly the IRS guidance will be discussed, as this seems to be the most prevalent and cited.

The IRS recognizes three general aspects of the working arrangement that have to be handled properly to assure an independent contractor vs. employee relationship—i.e. financial control, behavioral control, and relationship between the parties. The nuances of practical workplace application of the tests can be detailed and involved. Please consult the IRS website (www.irs.gov) as a starting point to understanding why contractual terms read the way they do and how workplace practices can be affected. IRS Form SS-8 (“Determination of Worker Status for Purposes of Federal Employment Taxes and Income tax Withholding”) can assist in determining if a worker is an employee or independent contractor.

We will discuss each of these parameters in some detail, but in general, if an individual can control the means and methods of how the work is done to meet client prescribed results, and then s/he could likely be classified as an independent contractor.

Financial Control

A few of the important aspects the IRS Form SS-8 covers are the following:

• Who provides what tools, supplies to accomplish the work?

• Where is the primary work space and how is it paid for?

• How incurred expenses are handled—i.e. expense accounts, reimbursements, etc.?

• How is the worker paid for services rendered?

• Does the client carry worker’s comp insurance on the worker?

• What economic loss/financial risk does the worker carry beyond payment for services?

There are degrees of “client office” presence for a consultant, depending on the nature of

the work/project. In some cases, the consultant may be so seldom on the client’s premises that there’s no dedicated workspace or tools/equipment provided. However, there may be cases where there’s office space, access to computer systems and file room data on an ongoing basis. Often client IT security restrictions may not allow a consultant to utilize their personal PC in connecting to a client company’s system.

The following are some actions the independent contractor can take to support his/her status as independent contractor in most all types of work environments:

-Provide as much of your own working tools (PC, consumables, etc.) as you can in performing the work. If client’s IT security won’t allow a workplace hookup with a contractor owned PC, perhaps they will allow a limited home hookup with contractor owned equipment to at least handle e mails.

-The contractor can devise and use his/her own timekeeping documentation, invoicing for client review/payment approval.

-The contractor can devise and use his/her own expense report form for client review/approval. However, sometimes the client prefers their own form for accounting purposes.

-The contractor purchases their own business liability insurance to protect against injury, property damage while performing work.

-As a part of the written contract (more on this later), the contractor specifies his/her fee structure and how expenses, special situations will be handled.

-Even if offered, it’s best not to participate in company sponsored employee programs—i.e. parking permits, transportation discounts/tickets, department store discount programs, safety incentives, etc.

-As far as paid time off, the author feels it’s best for an independent contractor to generally steer clear of paid off time, which is usually an employee benefit. The general rule would be for the contractor only to be paid for time worked.

Behavioral Control

A few of the important aspects the IRS Form SS-8 covers are the following:

• What specific training & instruction does company provide to contractor?

• How does contractor receive work assignments?

• Who determines the means & methods of how the work will be done?

• What is the contractor’s daily routine and work hours?

• Where is the work performed?

• What types of reports are required from the contractor?

• What meetings, conferences are the contractor required to attend?

If the contractor is presented with the required results of the assignment, but can control the means and methods of how the work is performed (within company policy & regulatory compliance constraints) to meet client prescribed results, then this is a factor favoring independent status. (This is one of the main parameters.)

Additionally, even if there are core work hours, if the contractor can pretty much determine his/her own work schedule, this also is a factor in favor of maintaining independent contractor status.

As far as paid time off, the author feels it’s best for an independent contractor to steer clear of paid off time, which smacks a regular employee benefit. The general rule would be only to be paid for time worked.

Finally, although contractors may attend an occasional meeting related to a project or assignment s/he is working on, the usual employee company meetings—management updates, HR meetings, etc. are normally not attended by contractors-even if available.

Relationship between Contractor and Firm

Some of the areas the IRS SS-8 form covers under this parameter are as follows:

• What benefits are available to the contractor?—i.e. paid vacations, sick pay, holidays, personal off days, insurance benefits, safety incentives, employee discount/club memberships, health care, parking, transportation, worker’s compensation, etc.

• Can the relationship be terminated by either party without incurring liability or penalty?

• Does the contractor perform similar services for others for the prescribed time period reviewed?

• What type of advertising does the contractor do?

• How does the company represent the contractor to third parties?

• What is the governing mechanism for the working arrangement?—written contract, purchase order, work order, mutual understanding, etc.

The aforementioned are but a few of the points major points of this section from the SS-8, but the actions recommended are as follows:

-Generally, the contractor should not be provided nor should accept benefits as employees have—i.e... Paid off time for vacations, sick time, holidays (may be contractual exceptions on this one), personal days off. Also, contractor should not participate in “employee only” programs such as safety incentives (unless there’s a separate program for contractors), discount/club memberships, transportation/parking payments or reimbursements.

-A significant factor is that the contractor provides services for other companies during the period examined.

-The contractor should not have business cards that represent him/her as an employee of the firm they’re contracted to, nor should they be introduced/portrayed as such. (It’s best not to use a client’s logo on a business card.)

-Generally, the contractor should have a written contractual agreement with the client that clearly specifies an independent contractor-client relationship. However, this document does not hold weight with the IRS unless the actions under the contract are consistent with one functioning as an independent contractor. In other words, the IRS doesn’t care as much what a written contract says (or even if one exists), as it does how one actually works via the tests of the behavioral, financial and relationship parameters.

Other Factors

It’s usually best that the contractor be annually IRS Form 1099’d by the client, and no mandatory taxes be withheld by the company—i.e. income tax, Social Security, Medicare taxes, and Federal unemployment tax. The independent contractor should pay these taxes.

Generally, the contractor should not attend or participate in what is generally accepted as “employee only” programs or work processes such as annual performance reviews, Management communication meetings, company functions (unless there’s a general invitation to all similar contractors).

One has to recognize that the IRS would likely review all aspects of an individual’s work situation and can apply the “tests” cumulatively in determining whether s/he is functioning an independent contractor or employee. Issues can arise especially if the contractor openly participates in anything that’s usually employee reserved.

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Conclusion

Maintaining the independent contractor vs. employee status involves gaining knowledge of the regulatory “tests” and the proper application of work practices thereof. Some salient suggestions are as follows:

• Consult and thoroughly read/understand the IRS guidance found on www.irs.gov

• Have a written contract that spells out the independent contractor/client relationship, and assure work practices are consistent with that document.

• Purchase personal liability/property damage liability insurance to support the written contract requirements while on the job

• Exercise independence and innovation in how you use the means and methods at your disposal to accomplish the client’s prescribed results.

• Provide as much of your own tools, equipment and resources as feasible.

• Work for multiple client companies.

• Do not participate in company sponsored “employee only” benefits programs, sessions or perks

• Assure your client(s) send you an IRS Form 1099 annually

• Do not consistently portray or allow yourself to be referred to an employee

• Generally, stick to the rule-“if I don’t work, I don’t get paid”

• Consult a qualified employee law attorney or other advisor if necessary

I hope this sheds some light on what can be a challenging but important determination,

depending on the specific work circumstances of the individual.

9/14/16

Biography:

Robert (Bob) Langley, P.E. holds a B.S. Degree in Chemical Engineering from the University of Oklahoma. For over 30 years he worked for Fortune 500 midstream (natural gas processing) companies as Process Engineer, Plant Engineer, Plant Supervisor, Plant Manager, Supply and Distribution Manager, Supply Chain Manager and Environmental, Safety & Health Manager. Currently, Mr. Langley is engaged as an independent contractor to provide Supply Chain/Procurement support services for a major midstream energy company, primarily in the area of master service agreements, and has undergone a third party legal review regarding his independent contractor status.

References:

Website: www.irs.gov

Megerdomian, Linet-“Distinguishing Independent Contractors and Employees”-an excellent web based, short article (3 pages) reference

U.S. Department of Labor (Wage & Hour Division)-Fact Sheet #13: Am I an Employee?

This link for the “IRS 20-Factor Test”: https://www.angelo.edu/services/sbdc/documents/library_resources/IRS%2020%20Factor%20Test.pdf

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