Article by Grace Lee
Independent schools have long struggled with the question of whether to hire that math tutor, after-school chess instructor or curriculum consultant as an employee or an independent contractor. It may, at times, make sense to hire a worker as an independent contractor, but with renewed enforcement efforts at both the federal and state levels, schools might want to take a second a look at their classifications.
In 2015, the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) asked Congress for $277 million in funds for fiscal year 2016, an increase of $49 million. More than $30 million would be allocated to hire 300 investigators “for additional enforcement staff and support,” especially in the area of misclassification of employees as independent contractors. In recent years, the WHD has launched many lawsuits in this area resulting in large back pay awards and settlements. This ‘misclassification initiative’ is driven by the concern that misclassified employees are often denied access to critical benefits and protections to which they are entitled, such as family and medical leave, overtime, minimum wage and unemployment insurance. In addition, employee misclassification represents substantial losses to the Treasury, the Social Security and Medicare funds, and state unemployment insurance and workers compensation funds.
With tax dollars at stake, the Internal Revenue Service (IRS) has joined forces with DOL to share information and ensure compliance with federal laws. States have also joined DOL in information-sharing programs to coordinate enforcement efforts.
Questions of Control
The analysis of whether a worker should be classified as an independent contractor or an employee depends on many factors but largely comes down to a question of control—who controls what will be done and how it will be done? The IRS has adopted a test of 20 factors that fall into three main categories: behavioral control, financial control and type of relationship. However, most federal courts apply a “five-factor test” to determine whether a worker is an employee or an independent contractor:
- Does the worker or company control the details of the work?
- Does the worker or company supply the equipment needed to do the work?
- Does the worker have an opportunity to make a profit or suffer a loss in performing the work at issue?
- Is the relationship between the company and the worker permanent or temporary, and is the work of an “on again/off again” nature?
- Does the job require skill and initiative?
While the degree of ‘control’ is not easily defined, a worker is probably an employee, by this analysis, if the school requires him or her to follow instructions, provides the curriculum or resources, and tells the employee when, where and how the work is to be done. Other indications of an employment relationship include employer-provided training and evaluation, reimbursement for expenses, and coverage under the school’s insurance. Also, hourly, weekly or monthly pay schedules usually indicate an employment relationship in which employers typically pay independent contractors a flat rate or lump sum for a job or task described in the agreement.
The control interpretation may lead to surprises. For instance, a school may feel confident that a worker is an independent contractor if he or she has an independent business and conducts similar work for other schools. However, the school’s amount of control over the worker may indicate an employment relationship. For example, in a Private Letter Ruling, the IRS examined a case in which a college retained an art instructor to teach each Friday for a three-hour period. The instructor was paid a lump sum, had his own business and worked at other colleges. Despite all this, the IRS found that an employment relationship existed based on the following factors: the relationship was continuous in nature; the instructor’s service was integral to the business conducted by the college; he had made little investment in his “business”; the college exercised control over the curriculum, facility and class scheduling; and the college consulted with the instructor weekly regarding his performance.
The Accountability Advantage
Beyond staying out of trouble with the IRS and DOL, schools have other reasons to classify workers as employees. Not only does the school retain greater control over how the work gets done, but it can better hold the worker accountable to school policies and standards of conduct. For example, a seasonal coach may be better categorized as an employee if he receives direction from the athletics director, is given items such as practice/game schedule and employee handbook, is covered under the school’s liability insurance, and is trained by the school on matters such as preferred coaching methods, appropriate boundaries with students and how to handle parents.
In the event that a worker is truly an independent contractor, the school should create a clear independent contractor agreement with him or her. Rest assured that any such agreement will be reviewed during an investigation, so the document should clearly cite factors that make the worker a contractor. For example, “the worker will bring his or her own equipment or tools, may perform services for other business, can assign tasks to others, provides his or her own liability insurance and benefits, is not eligible for employee benefits, has his or her own tax identification number….” The agreement should also describe the work that the contractor will do—but not how he or she will get the work done.
