Besides the IRS and States, you should also be aware of possible conflicts with Federal Regulations. Independent contractors have successfully filed charges against their clients claiming coverage as an employee under many labor laws including minimum wage, overtime and nondiscrimination laws. Under the following labor laws, the definition of an employee varies, but is generally less restrictive than the law factors used by the IRS:
- ERISA (Employee Retirement Income Security Act)
- FLSA (Fair Labor Standards Act)
- FMLA (Family Medical Leave Act)
- ADEA (Age Discrimination in Employment Act)
- ADA (Americans with Disabilities Act)
- WARN (Worker Adjustment and Retraining Act)
- TITLE VII (Civil Rights Act)
- COBRA (Consolidated Omnibus Budget Reconciliation Act)
Safe Havens – Section 530
In the 1970′s there was a push to reclassify independent contractors as employees by the IRS, similar to what is happening today. Congress reacted to this by establishing Section 530 of the Revenue Act of 1978. This section established some safe havens that protect businesses from IRS reclassification, provided certain requirements are met. The Section 530 safe havens have been the source of much controversy over the years. It is important to note that states are not bound by this act and that interpretations by the IRS have varied. The following is a brief overview of the section. Consult your legal counsel before determining if this section might apply to your situation.
Section 530 applies if an employer has:
- Never treated the individual in questions as an employee in the past.
- Consistently treated the worker as an independent contractor on all forms.
- Not treated any other workers holding a substantially similar position to the worker in question as an employee. (Must consider relationship of parties.)
- Has a reasonable basis for treating the individual as an independent contractor. (*Note: The burden of proof has shifted to the IRS regarding reasonable treatment.) Some of the ways reasonable basis can be established include:
- Acceptable precedent - An employer can establish acceptable precedent in the following ways:
- A judicial precedent
- A published IRS ruling
- An IRS technical advice memorandum pertaining specifically to the worker
- An IRS determination letter pertaining to this worker
- A previous IRS Audit – It is not necessary that the audit being relied on was for employment tax purposes.
- Recognized Long Standing Industry Practice – This safe haven is often very difficult to prove, though it has been used successfully. This can be a safe haven only if 25% of the company’s industry classifies workers as independent contractors.
There are also other less common ways to establish reasonable basis under Section 530. It is important to note once again that the state tax authorities are not bound by Section 530 and will often disregard it. NOTE: Commencing after 1996, the IRS must provide written notice of provisions of Section 530 at/or before an audit involving worker classification issues.
Legislation & Court Cases
The following court cases and plaintiffs complaints illustrate the impact of the use of contingent workers in today’s workforce: