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A friend recently found and moved her life across the country to take a job with a start-up company. Though the move was risky, the ability was too amazing to pass up.
Initially she was hired as a full-time employee, but eight months later, the company changed her role to that of an unbiased contractor. For me personally, this raised two questions: Could it be better for a worker to take a position as an unbiased contractor or even a regular employee? And why might an employer choose one over another?
Within the last 40 years, Congress has passed several laws that outline the distinctions between employees and independent contractors in relation to their compensation, benefits and relationships for their employers. Section 530 of the Revenue Act of 1978 laid the initial groundwork for the regulations we follow today.
In the 1960s and early 1970s, there was a growing concern for the future of the Social Security program. Some blamed the funding issue on independent contractors skimping on self-employment tax. This perception generated a growth in audits by the Internal Revenue Service. This, consequently, generated criticism that the IRS was too aggressive in classifying workers as employees, as opposed to as self-employed independent contractors, and so it applied its criteria inconsistently. Congress responded by enacting Section 530, providing safe harbor for employers by steering clear of the IRS from retroactively reclassifying independent contractors as employees. Section 530 protected employers from large penalties and back taxes so long as they met the law's standards.
For employers to qualify for safe harbor under Section 530, the IRS required: a reasonable basis for treating the workers as independent contractors; consistency in the manner such workers were treated; and proper tax reporting using 1099 forms for anyone categorized as contractors. Though Section 530 was meant to be an interim measure for the audit problem of the'60s and'70s, it became the enduring baseline for today's worker classification regulations. Subsequent legislation, such as the Small Business Job Protection Act of 1996, further clarified the language in Section 530, along with the principles of safe harbor availability and the question of who holds the burden of proof for classifications.
Many employers use the following guideline to distinguish between a contractor and a member of staff: If an employer has the right to control both the means by that your worker performs their services and the ends that work produces, the worker is recognized as an employee. In 1987, the IRS released a 20-factor list, predicated on prior cases and rulings, to help employers resolve a number of the "gray areas" this rule does not resolve. Some of the factors included on the list were: training; set hours of work; payment by the hour, week or month; furnishing tools or materials; doing focus on the employer's premises; and payment of business expenses.
For example, if the employer requires the worker to go by way of a training class before commencing work, or to make use of particular tools or materials the employer provides, the worker would qualify being an employee. Similarly, if the employer requests the worker be on site at the organization headquarters from 8 a.m. to 5 p.m. every day, the worker is an employee, not an independent contractor.
The overarching theme of these factors is that the employer has the right to control how an employee produces his / her work. When hiring an unbiased contractor, the employer gives up this control. Independent contractors have a powerful concentrate on the last result, not the method to perform the project. Overall, the IRS'20-factor list helped many employers create a baseline to evaluate the role of the hires and avoid misclassification.
In 1996, the IRS took the list a step further by identifying three broad types of evidence to be found in discriminating between a member of staff and an unbiased contractor. The three categories are behavioral control, financial control and relationship of the parties. Generally, employers can just only minimally regulate contractors'behavior. Contractors have the freedom to subcontract the job they receive, complete the job in the way they feel is most efficient, and set their own hours and work location.
Financial control ensures that contractors'payment standard is based on a "per task" or "piece work" pay. Therefore, the quantity of time and energy contractors expend on the job they produce is around the contractors, not their employers. In comparison, employees are typically paid an hourly wage or even a salary, which their employers monitor and control, alongside how many hours worked. Employees also may receive additional benefits, such as for example health coverage or retirement plans, which independent contractors don't receive.
The next category, relationship of the parties, refers to the increasing practice of employers requiring employees to sign non-compete clauses or non-disclosure agreements. Generally, independent contractors are not required to sign such legal contracts. Contractors can work with multiple employers should they so choose - even competing employers. An employer does not have the best to control the relationships an independent contractor may develop outside of their benefit that particular employer.
The legal distinction between employees and contractors is clear. Why, then, would a worker or an employer prefer one situation over one other? There's no right or wrong answer in regards to a company or employee role, merely preferences for every situation.
An independent contractor enjoys more flexibility than the usual full-time employee. The contractor can essentially be their own boss, by developing their own schedule, working without close supervision, and taking on as heavy or light a workload as he sees fit. This provides open-ended earnings potential. Doing work for multiple employers also gives contractors more job security in a single sense, because one employer going broke or cutting back on staff will not destroy the contractor's whole stream of income. For a worker, on one other hand, it could be more appealing to have a predictable schedule, the possibility for advancement, and an even more stable income flow.