Employee or independent contractor? Determining how to classify a worker.

Question:

How should I determine whether to classify a worker as an employee or an in dependant contracter?

Answer:

Classifying an individual as an independent contractor or an employee can be a difficult decision to make with severe consequences. The easiest way to avoid this problem is to classify every worker at your property as an employee. Although, this can be a costly decision in the long run because of the taxes that must be paid if the worker is reclassified as an employee. If an individual is determined as an employee, you are liable to pay and withhold Federal income tax, social security and Medicare taxes, plus Federal unemployment tax (Internal Revenue Service [IRS], n.d.).

"In general, someone who performs services for you is your employee if you can control what will be done and how it will be done" (IRS, n.d.). FLSA (Fair Labor Standards Act) provisions such as employment discrimination, overtime pay, minimum wages, child labor, etc. do not apply to independent contractors, therefore the status of a worker must be examined carefully to determine how an examining agent would classify the employee ("Chapter 1 employer/employee relationship: independent contractor," n.d.).

The differences between an employee and independent contractor are not examined in the FLSA according to the United States Supreme Court. The U.S. Supreme Court has set forth three main categories in deciding whether a worker is an independent contractor or an employee. These three categories are:

1. Behavioral Control. Does the business have a right to direct and control the worker?

2. Financial Control. Does the business have a right to control the business aspects of the worker's job?

3. Type of Relationship. What type of relationship is there between the worker and the business?

These three categories are further broken down into seven significant factors in determining whether a worker is an employee or an independent contractor. "The U. S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. The Court has held that it is the total activity or situation which controls." (U.S. Department of Labor, n.d.)

Common Law Factors

Factor 1. The extent to which the services rendered are an integral part of the principal's business.

Factor 2. The permanency of the relationship.

Factor 3. The amount of the alleged contractor's investment in facilities and equipment.

Factor 4. The nature and degree of control by the principal.

Factor 5. The alleged contractor's opportunities for profit and loss.

Factor 6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.

Factor 7. The degree of independent business organization and operation.

IRS Factors

The Internal Revenue Service has also determined factors to distinguish between an employee and an independent contractor. Publication 15-A, Employer's Supplemental Tax Guide, by the Internal Revenue Service provides general decision guidelines which are listed below pertaining to the three categories of behavioral control, financial control and type of relationship as set forth by common law. (IRS, n.d.)

Behavioral Control

An employee is generally told:

* When, where, and how to work

* What tools or equipment to use

* What workers to hire or to assist with the work

* Where to purchase supplies and services

* What work must be performed by a specified individual

* What order or sequence to follow

An employee may be trained to perform services in a particular manner.

Financial Control

* The extent to which the worker has no expenses that need to be reimbursed

* The extent of the worker's investment

* The extent to which the worker makes services available to the relevant market

* How the business pays the worker

* The extent to which the worker can realize a profit or loss

Type of Relationship

* Written contracts describing the relationship the parties intended to create

* Whether the worker is provided with employee-type benefits

* The permanency of the relationship

* How integral the services are to the principal activity of the business

Caddies

One question that seems to resurface many times is the classification of caddies at golf course facilities. Historically caddies have been treated as independent contractors. In order to meet the common law test for independent contractor status determined by the courts, a club must have certain procedures in place. First of all, a club may set pay rates for its caddies, but these rates should be only guidelines for the members and the actual rate should be determined by the member ("Chapter 1 ...," n.d.). Secondly payment should be made directly to the caddie by the member.

The assignment of caddies is another area that must have strict procedures in place. "It should be made clear that the selection of the caddie is solely the decision of the member, not the starter. it should also be made clear to the caddie that he does not have to caddie for any player, unless he elects to do so. The role of the starter should be strictly that as a service to the member by possibly recommending a caddie suitable to the member's playing ability." ("Chapter 1 ...," n.d.) These general guidelines can be applied to other jobs of this nature.

Employer Responsibilities

As an employer there are tax and reporting requirements in the cases of employees and independent contractors. The following explains the basic responsibilities in both cases as mandated by the Internal Revenue Service. (IRS, n.d.)

Employee

* Withholding Federal income tax

* Withholding and paying the employer social security and Medicare tax

* Paying federal unemployment tax (FUTA)

* Issuing Form W-2, Wage and Tax Statement, annually

* Reporting wages on Form 941, Employer's Quarterly Tax Return

Independent Contractor

* Issuing Form 1099-MISC, Miscellaneous Income, to report compensation paid

This article only touches a few important points that pertain to the determination of independent contractors at the federal level, and as in many other cases, statutes may be stricter at the state level than at the federal level. It is recommended that this article is used as a general guideline and that expert advice should be sought before making any determinations as to the status of an employee/independent contractor. For further information on this topic contact the HFTP Research Institute.

Resources

* Chapter 1 employer/employee relationship: independent contractors. (n.d.). Retrieved June 1, 2004, from Premier Club Services database.

* Internal Revenue Service. (n.d.). Employee or independent contractor?. Retrieved July 7, 2004, from http: //www.irs.gov

* U.S. Department of Labor. (n.d.). Fact sheet #13: employment relationship under the fair labor standards act (FLSA). Retrieved July 7, 2004, from http://www.dol.gov/esa

Get Important Questions Answered at the HFTP Research Institute

In January 2002. HFTP joined forces, with the Conrad N. Hilton College of Hotel and Restaurant Management to develop the HFTP Research Institute (HFTPRI). The Institute is designed to assist members in their everyday management decisions by answering important questions that take up their valuable time.

The HFTPRI is a free service to dues-paying members of HFTP. The Institute will also conduct research for nonmembers for a nominal fee. Resources for the research come from the university's library and archives, which contain graduate papers, periodicals, educational videotapes and over 10,000 books relating to the hospitality industry. In addition, the research center has access to the Internet and to over 20 professors and lecturers with numerous years of experience in the hospitality industry.

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The institute is also actively involved in developing new research topics that will benefit the membership of HFTP. The institute, in conjunction with HFTP, produces a bi-annual compensation and benefits survey, with the newest survey results being released in Fall 2004. Also, the HFTPRI is compiling benchmark statistics on hotel and club finance and technology with the results available on the HFTP web site. To get more information or to request research contact the research institute's program director Tanya Venegas at (866) 572-HFTP or at [e-mail].