Unemployment Compensation Service Case Study

Independent Contractors

Certain businesses find cost savings, increased efficiencies, and tax advantages by hiring contractors. When outsourcing work, it is important to be aware of the very thin line that distinguishes an employee from an independent contractor.

Background
The employer is a mattress manufacturer and distributor with several plants in Florida, Mississippi, and Louisiana. The company controller felt the company could save money if a method for buying mattress materials and machinery parts could be consolidated into a one-stop process. To accomplish this, the company advertised for a consultant/buyer. The candidate was told they would be an independent contractor and would be expected to study the employer business and make recommendations as to how to accomplish the consolidation within one year. After one year had passed, the person hired as a consultant had not accomplished the consolidation project wanted by the business and was replaced by an outside professional consulting agency. Since the person had been well liked and had a great deal of knowledge about the business, he was offered a position with the employer to manage acquisitions. The offer of employment was turned down and the relationship was ended.

The Claim 
The former consultant filed a claim for unemployment benefits showing the business as the last employer. A claim was generated to ADP as the agent of record. ADP responded with information supplied by the employer showing the claimant was an independent contractor. Supporting documentation showed a 1099 filing in the name of the claimant. The claim for benefits was denied, an appeal was filed, and a hearing was set.

The Hearing 
At the hearing, the business declined assistance from ADP with respect to preparation or representation at the hearing. The controller and payroll manager represented the business at the hearing. The witnesses were steadfast in the assertion that the claimant was an independent contractor and not an employee. A written statement by the company president was submitted and his handwritten notes regarding the terms of the agreement with the claimant to act as an independent contractor. The claimant testified that the terms presented in the handwritten notes were not familiar to him and he did not recall this discussion with the company president. Through testimony, it was shown that the claimant was only able to complete work during normal business hours due to needing access to the business computer system and technical manuals. The claimant was also expected to notify the business when he would not be in for any reason and to notify if he was going to arrive late or leave early. While it was true that the claimant submitted monthly bills for services, the bills were sometimes late, but a check was still issued on a normal payroll cycle from the business payroll account. Finally, the claimant filled in for the manager of acquisitions when she had been on maternity leave for a period of eight weeks. This was at the request of the general manager. The controller explained that the claimant was only allowed to perform services during normal business hours, due to security reasons and that the location was only open certain hours. There was no external way for any person to access the business computer system. The payroll manager explained that a clerk had set up payments to the claimant in the employer payroll system in error. The payroll system was programmed to issue a check on certain intervals unless overridden. No one at the business had been aware of this until the hearing. Neither witness had any testimony about the claimant being required to notify of time off. They had thought the claimant was being courteous by notifying them of time off, but neither had expected or required it.

The Decision
The administrative law judge found in favor of the claimant. The decision stated that the employer had restricted the acts of the claimant and had exerted control over the claimant in such a way that an employer-employee relationship was shown to exist. The matter was referred to the State Tax Agency, which required the employer to pay taxes for the claimant and fined the employer for not filing tax forms properly.

The Final Word 
When dealing with independent contractor situations, be sure that your business is acting appropriately and does not blur the line between a contractor and employee. When seeking to answer the employee or independent contractor question, a good resource is the Internal Revenue Web site at http://www.irs.gov/pub/irs-pdf/p15a.pdf For many years, employers have referred to a listing of 20 factors that the IRS uses in determining employees from contractors. While the 20 factors are an important guide, there is no "magic number" of the factors that will prove or disprove contractor status. The primary factors come down to which party exercises the majority of control over the work and how the agreement to perform work is structured.

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