When Shakespeare penned, “What’s in a name,” the meaning was that a name does not really matter. Romeo and Juliet found out otherwise. So do employers who interchange the terms employee and independent contractor.

The IRS and the DOL have major efforts underway to track down wrongly classified individuals. The Shakespeare defense will not fly.

Here is the distinction:
Employee: An individual who performs services that are subject to your control regarding what will be done and how it will be done (Treas. Reg 31.3121(d)-1(c)(1)).
Independent contractor: An individual who performs services where you control only the result of the work.

You must examine the concept of control through three lenses: behavioral control, financial control and type of relationship of the parties. Employers who are still unsure can file Form SS-8 with the IRS to have them make the determination. This process could take up to six months.

The government has stepped up enforcement and stated publicly that they take worker classification very seriously. The IRS and DOL have partnered with over a dozen states (e.g., Louisiana, California and Colorado, among others) to investigate and report improper classifications. The IRS concern focuses on the fact that employers don’t pay FICA for independent contractors, who also may underreport their earnings. The DOL’s primary concern is minimum wage and overtime violations, as well as the fact that independent contractors are ineligible for benefits. The IRS has created a program called the Voluntary Classification Settlement Program (VCSP) for eligible employers to experience some relief for the taxes and penalties associated with improper classification.

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