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Under US law, you are either an employee or an independent contractor. It's one or the other. There is no in between. The IRS has taken the lead in helping employers correctly classify their workers, by developing the "Common-Law Rules". The IRS formerly called them the "Twenty Common Law Factors". (See the glossary entry Common Law for a definition.)

On the flip side, the common-law rules also help independent contractors determine if they are exploited as employees. They are not hard and fast rules. Every situation is different and the IRS doesn't want to overly restrict the business of either employers or independent contractors. Rather they are broad guidelines that attempt to consider the whole picture. But the underlying principle is to measure the degree of control employers have over independent contractors, verses the degree of independence independent contractors have from employers.

Several Federal and state government agencies have their own independent contractor vs. employee rules, too. For example, the U.S. Department of Labor (DOL) enforces its rules under the Fair Labor Standards Act (FLSA). All such agencies typically allow some give and take on both sides of the fence, but for the most part, independent is the operative word in independent contractor.

If companies misclassify their workers, they risk getting audited by one or more of the agencies mentioned above, and then some. Although all agencies concerned are always on the lookout for violators, the IRS takes the lead here too, and aggressively so. If it finds a company guilty of misclassifying its workers, the IRS might require the company to pay all back withholding taxes plus interest, even if the misclassified independent contractors have already paid their taxes. The IRS might also levy huge fines and press criminal charges against the company officials. Once the IRS moves in, it opens the doors for the other agencies to collect their due. If there's anything left, the misclassified independent contractors might collect, too. Misclassified independent contractors have successfully sued for unemployment insurance, stock options, overtime pay, retirement benefits, profit sharing, disability payments, workers' compensation and more, in so-called "permatemps" and related lawsuits.

But you don't have to wait for an agency to make its move before you do. If you think you've been misclassified as an independent contractor to your disadvantage, you may complete Form SS-8 to ask the IRS to make a determination. If the IRS determines that you are essentially an employee of a company, that in turn might open the door for you to file a lawsuit under the FLSA, state unemployment insurance laws, or other Federal or state labor laws. But it's a good idea to consult with an attorney first, to determine if starting with the IRS is the best route.

Next Page > IRS Common-Law Rules for Independent Contractors
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This article is just a guide and not intended as legal advice. Neither the author nor publisher are engaged in rendering legal services. Please see an attorney for legal advice.

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