EMERGING ISSUES AFFECTING THE INDEPENDENT CONTRACTOR MODEL: Part 1, the IRS Test

Posted By Roberts & Associates || 23-Oct-2017

One of the single most important things to remember when thinking about independent contractor issues is that the status of the law is dynamic. Far too many companies view the situation as static and continue to do what they have always done, even in the face of the changing legal landscape. One must consider the context of state and federal litigation, statutory revision, changing guidelines, and changing tests being applied in their jurisdiction.

In the coming issues, I will endeavor to provide specific examples and analysis of changing case law, regulatory guidelines, tests, and statutes that I hope you will find of value. While not every example will apply to your business, and there may be issues from outside of the carrier/courier field, the trends in the application of the law provide real guidance. To that end, the most important piece of advice that I can provide is that you have your independent contractor agreements reviewed by a knowledgeable attorney. When it comes to legal expenses, an ounce of prevention costs so much less than a pound of cure.

One important change of note in recent years is the test used by the Internal Revenue Service. I am certain that you have all heard of the “20 factor test” previously employed by the IRS. It simply provided 20 factors, some of them rather redundant, without much in the way of weight or organization. More troubling was the lack of any advice as to how many factors could or should be found in each direction in order to make a determination.

Now, the IRS has attempted to simplify and refine the test, trimming the twenty factors into eleven, and organizing them into three groups: behavioral control, financial control, and relationship of the parties.

Behavioral control

This test considers facts which tend to show whether the company has the right to direct and control how the worker does the task it was hired to perform. [emphasis mine]. It is important that this factor is not whether there has been control exercised, but the right to do so.

The considerations here focus on instruction and training. Instruction of the when, where, how, with whom, and order or sequence of events are considered tenets of instructing an employee. Obviously, basic instructions on what the job encompasses – the object of it, are necessary, but when one is explicit as to how that objective is to be accomplished, the appearance is that of employer and employee. In our context, this may include order of events, route selection, etc. In a similar vein, training is something that an employee will ordinarily receive. An independent contractor uses his skill and knowledge to determine his own methods.

Financial Control

This test looks at how the worker is paid, whether the worker can make a profit or suffer a loss by his actions and choices, whether the services can be offered throughout the market, and whether there is any reimbursement for expenses.

These factors are all straightforward, and they are the simplest, in my opinion, to control for. It is essential that one not run afoul of the simple to follow factors such as these, because others are a much tougher balancing act.

Type of Relationship

The first three factors considered under this test are similarly straightforward and must be abided: A written contract showing the intention of the parties in regard to their choice of relationship; benefits like insurance, sick pay, vacation pay, or retirement planning, and permanency of the relationship (fixed or indefinite). This is where I break the rule that lawyers never say “always” or “never”: Always have a good IC Agreement, never give benefits, and always have a fixed period in the contract.

The final factor in this section is the single worst factor used, and the most troubling both in the courier, and long-haul carrier industry: “The extent to which services performed by the worker are a key aspect of the regular business of the company.” While I loathe this factor, it should be noted that its purpose is supposed to go to the issue of control. The idea is that if a worker is performing a key aspect of your regular business you are more likely to actually exercise control over that employee. However, the carrier model demonstrates the inefficacy of this factor.

While the factors have been consolidated and organized in the new test, they still boil down to just one thing: control. How much control over the service provider does your company have? This is why in every client consultation, one of the first questions I ask is whether you are sure that what your company actually wants is an independent contractor relationship with its drivers. There are clearly benefits and burdens to each model.

One final parting tip: I strongly discourage mixed use of employee drivers and independent contractors under one corporation. It will work against you in state or federal litigation. Moreover, far better than winning a court case, is not getting sued in the first place, and a mixed model sends mixed messages. The grass is always greener, and a disgruntled independent contractor driver might look at the employee driver and think, he’s got so much better of a deal. Having a mixture does not mean that you will get sued or lose that case, but it makes both more likely and makes my job as defense counsel that much more difficult.

For further information on the IRS test, see IRS Publication 15-A.

David W. Smith is a partner at Roberts & Associates, a full service transportation law firm that has served the industry for nearly two decades. This article is for informational purposes only, is not intended to serve as legal advice, and does not imply any attorney client relationship with between the author and any reader. The content is not intended to be used as a substitute for specific legal advice or opinions. Contact the author at Dsmith@lrobertsandassociates.com or visit www.lrobertsandassociates.com for further information about the firm.

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