Businesses Classifying Workers as Independent Contractors are Facing More Scrutiny

Companies in the Chicago area should be aware that federal, Illinois and other authorities are taking closer looks at whether individuals performing services for them are properly treated as independent contractors instead of employees. Because misclassification as an independent contractor generates less tax revenue and governments are facing severe budget pressures, enforcement officials are now are more likely to question employer determinations.

For example, the New York Times reports that the Obama administration's 2010 budget anticipates raising an additional $7 billion from more aggressive policing of business practices involving independent contractors, including for fines and penalties. Among other things, the article notes that the recession has made it less likely for workers to object or file complaints about misclassification. Likewise, it probably has been more tempting for companies to avoid an employee classification because they avoid employment tax, unemployment insurance, worker compensation, benefit, minimum wage, overtime and other obligations.

Deciding the appropriate class is not always easy. The Internal Revenue Service provides guidance and advises that a careful examination of the worker situation is needed, focusing on: behavioral control, financial control and the relationship of the parties.

The former refers to looking at who directs how work is conducted, as opposed to the results. Financial control involves the extent to which the worker is responsible for expenses, investments and losses and determines how payments are made. The latter goes to other factors pertaining to the degree of independence, such as whether the services are related to essential, ongoing, everyday needs of the business, whether the worker provides his or her own tools and whether the worker provides services to others. In short, the more the worker looks just like regular employees, the less the worker looks like an independent contractor.

It is possible to request a determination from the Internal Revenue Service regarding the correct status by filing Form SS-8.

For more detailed information or advice regarding independent contractor matters, contact our Chicago and suburban employment lawyers.