Author: VU Faculty
Producers often work for the agency with a lot of independence. Does that make them independent contractors rather than employees? What if they're paid as 1099 workers rather than receiving W2s? Obviously, their employment status can affect how they're viewed by the IRS and your state labor department with regard to workers compensation coverage.
"Can you please provide information as to how to define an independent contractor (a commissioned producer) vs. an employee? We have always treated our producers differently than our CSRs. Producer income is 100% 1099 income, while CSRs have W2 income. We are doing some corporate restructuring and the lawyer has questioned whether or not the solicitors are indeed independent contractors, regardless of the 1099 income situation. My concern is that we do not cover them under WC, provide benefits, etc. because we have never viewed them as employees."
This is an issue that every agency needs to reconcile before problems arise with the IRS or your state labor department. Needless to say, their employment status can affect taxes and contributions, not to mention their eligibility (and your responsibility) for workers compensation benefits.
Keep in mind that how the IRS and labor departments view the independent contractor vs. employee issue may be completely different and each may reach different conclusions. Below are some thoughts from the VU faculty. In addition, here are a couple of related articles:
The first article by Al Diamond discusses some of the IRS and related issues. The second article addresses labor department issues governing workers compensation coverages.
In Maine—repeat in Maine—the tax status is NOT one of the tests relative to Employee vs. Independent Contractor with regard to eligibility for workers compensation benefits. The tests are from a 1930s case and are now memorialized in the Maine Workers Compensation Act, as follows:
13. Independent contractor. "Independent contractor" means a person who performs services for another under contract, but who is not under the essential control or superintendence of the other person while performing those services. In determining whether such a relationship exists, the board shall consider the following factors:
A. Whether or not a contract exists for the person to perform
a certain piece or kind of work at a fixed price;
B. Whether or not the person employs assistants with the
right to supervise their activities;
C. Whether or not the person has an obligation to furnish any
necessary tools, supplies and materials;
D. Whether or not the person has the right to control the progress
of the work, except as to final results;
E. Whether or not the work is part of the regular business of the
employer;
F. Whether or not the person's business or occupation is typically
of an independent nature;
G. The amount of time for which the person is employed; and
H. The method of payment, whether by time or by job
In applying these factors, the board may not give any particular factor a greater weight than any other factor, nor may the existence or absence of any one factor be decisive. The board shall consider the totality of the relationship in determining whether an employer exercises essential control or superintendence of the person.
Looking at the information about Maine, I can say that Tennessee is similar in that there is a statutes that lists something like seven criteria that must be considered in determining employee vs. independent contractor for workers compensation.
Most "independent contractors" working with independent agencies will fail the IRS independent contractor test. The penalties involved are pretty significant and I've been told the IRS is going to look more closely at independent contractors this year. For verification of whether any agency's independent contractors pass or fail the IRS independent contractor test, you do need a labor attorney. Don Phin knows agencies and I know he can help on this. His email is: don@donphin.com.
In my experience, very few agencies really have independent contractors as agents. I have yet to see an agency that classifies their producers as ICs allow them to place business anywhere and with anyone they please. In other words, some business could be placed with your agency and if you don't have the right carrier, then they can place it with another agency. Doesn't sound too familiar, right?
Agencies have long sought to avoid the worker's comp premium and FICA taxes associated with highly paid producers. They are usually employees and if ever audited by the IRS, you could be paying a lot of back taxes and penalties.
Just to be sure though, below is the current 20 question test from the IRS on whether or not they are Independent Contractors. If you can honestly answer every single question "no," then you are probably safe. However, your agency would be truly unusual.
Your attorney is correct. Good luck.
11-3.20
The following 20 common-law factors are used by the IRS. These factors are the basis of Form SS-8, which is used by the IRS to analyze the employee/independent contractor question:
(1) Compliance with instructions. A person who is required to comply with instructions about when, where, and how to work is ordinarily an employee. The control factor is present if the employer has the right to instruct, whether or not he in fact does so.
(2) Training. Training of a person by an experienced, employer, by correspondence, by required attendance at meetings, and by other methods indicates control because it shows that the employer wants the services performed in a particular method or manner. This is especially true if the training is given periodically or at frequent intervals, Independent contractors ordinarily rely upon their own resources for training and receive no training from the purchasers of their services.
(3) Integration with business. Integration of the person's services in the business operations generally shows that the person is subject to direction and control. In determining whether integration exists, it is necessary to determine the scope and function of the business and whether the services of the individual are merged into it.
(4) Personal rendition of service. If services must be rendered personally, it indicates that the employer is interested in the methods as well as the results. The employer is interested not only in getting a desired result, but also in who does the job. Lack of "employer"-type control may be indicated when an individual has the right to hire a substitute without the employer's knowledge.
(5) Hiring, supervising and payment of assistants. Hiring, supervising, and payment of assistants by the employer generally shows control over the workers on the job. Sometimes one worker may hire, supervise, and pay the other workers. This may result from a contract under which the worker provides materials and labor and is responsible only for the attainment of a result. In this case, the worker is an independent contractor. On the other hand, if the worker hires, supervises, and pays other workers at the direction of the employer, the worker may be acting as an employee in the capacity of a supervisor or representative of the employer.
(6) The existence of a continuing relationship. The existence of a continuing relationship between an individual and the person for whom the individual performs services is a factor tending to indicate the existence of an employer-employee relationship. Continuing services may include work performed at frequently recurring, though somewhat irregular, intervals. If the arrangement contemplates continuing or recurring work, the relationship is considered permanent, even if the services are rendered on a part-time basis, or the person actually works only a short time.
(7) Set hours of work. The establishment of set hours of work by the employer is a factor indicative of control. This condition bars the worker from being master of her own time, which is a right of the independent contractor. Of course, an independent contractor often must work when facilities are open to her and must complete an entire job within a certain period of time. However, it is the flexibility within these necessary time restraints that separates the independent contractor from the employee. Where fixed hours are not practical because of the nature of the occupation, a requirement that the worker work at certain times is an element of control.
(8) Exclusive full-time work. If the worker must devote full time to the business of the employer, the employer has control over the amount of time the worker spends working. This implicitly restricts the worker from doing other gainful work. An independent contractor, on the other hand, may choose for whom and when to work. Full-time does not necessarily mean an eight-hour day or a five or six-day week. Its meaning may vary with the intent of the parties, the nature of the occupation, and the customs of the locality.
(9) Work on employer's premises. Doing the work on the employer's premises is not control in itself; however, it does imply that the employer has control, especially where the work is of such a nature that it could be done elsewhere. A person working in the employer's place of business is physically within the employer's direction and supervision. The use of desk space and of telephone and stenographic services provided by an employer places the worker within the employer's direction and supervision, unless the worker has the option as to whether to use these facilities. Work done off the premises does indicate some freedom from control; however, it does not by itself mean that the worker is not an employee.
(10) Sequence of work done. If a person must perform services in the order or sequence set by the employer, it shows that the worker may be subject to control as the worker is not free to follow his own pattern of work, but must follow the established routines and schedules of the employer. This is true if the employer retains the right to do so even if in fact he does not.
(11) Reports recruited. If regular oral or written reports must be submitted to the employer, it indicates control in that the workers are compelled to account for her actions.
(12) Payment by hour, week, or month. An employee is usually paid by the hour, week, or month, whereas payment on a commission or job basis is customary where the worker is an independent contractor. Payment by the job includes a lump sum, which is computed by the number of hours required to do the job at a fixed rate per hour. The guarantee of a minimum salary or the granting of a drawing account at stated intervals with no requirement for repayment of the excess over earnings indicates the existence of an employer-employee relationship.
(13) Expense account. Payment by the employer of the worker's business and/or traveling expenses is a factor indicating control over the worker. Conversely, a lack of control is indicated where the worker is paid on a job basis and has to take care of all incidental expenses.
(14) Tools and materials supplied. The furnishing of tools, materials, etc., by the employer is indicative of control over the worker. Where the worker furnishes the tools, materials, etc., it indicates a lack of control; but in some occupational fields, it is customary for employees to use their own hand tools.
(15) Facilities-furnished. A significant investment in facilities by the person performing the services tends to show an independent status. On the other hand, the furnishing of all necessary facilities by the "employer" tends to indicate the absence of an independent status on the part of the worker. Facilities generally include equipment or premises necessary for the work, but not tools, instruments, clothing, etc., that are provided by employees as a common practice in their particular trade.
(16) Risk of loss. Individuals who are in a position to realize a profit or suffer a loss as a result of their services are generally independent contractors, while individuals who are employees are not in such a position.
(17) Number of "employers." If a person works for a number of persons or firms at the same time it usually indicates an independent status because in such cases the worker is usually free from control by any of the firms. It is possible, however, that a person may work for a number of people or firms and still be an employee of one or all of them.
(18) Availability to general public. Workers who make their services available to the general public are usually independent contractors.
(19) Power to fire. The right to discharge is an important factor it: indicating that the person possessing the right is an employer. The employer exercises control through the ever-present threat of dismissal that causes the worker to obey instructions. Independent contractors, on the other hand, cannot be fired as long as they produce results that measure up to their contract specifications. Sometimes an employer's right to discharge is restricted because of the employer's contract with a labor union or through increasingly more liberal judicial decisions in favor of employees. Such restrictions do not weigh unfavorably against the existence of an employment relationship.
(20) Termination damages. An employee has the right to end the relationship with the employer at any time the employee wishes without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion or is liable for breach of contract.