News & Views

EMPLOYEE OR INDEPENDENT CONTRACTOR?

We recently have been approached by several of our professional service clients who are the target of an audit by the Texas Workforce Commission (“TWC”).  The focus of the audit is whether certain persons providing services to the company are truly independent contractors or whether they actually are employees.  This primarily involves dental hygienists. 

It is critical that an employer correctly determine whether an individual providing services is an employee or an independent contractor.  Generally, an employer must withhold income taxes, withhold and pay Social Security and Medicare taxes and pay unemployment tax on wages paid to an employee.  An employer generally does not have to withhold or pay any taxes on payments to independent contractors.  The consequences of failing to classify an employee or independent contractor correctly are severe.

The Internal Revenue Service (“IRS”) formerly adopted a 20-factor test to determine employment status.  Under pressure from Congress and from representatives of Labor and Business, it has attempted to simplify and refine the test, consolidating the twenty-factors into eleven main tests within three main groups, Behavioral Control, Financial Control and the Type of Relationship of the Parties.

The TWC continues to use the former 20-factor test.  It is based on the common law test that a worker is an employee if the purchaser of that worker’s service has the right to direct or control the worker, both as to the final results and as to the details of when, where and how the work is done.  A determination of the right to direct or control is based on whether twenty- common law factors apply to the worker.  The twenty factors are:

The audits of any clients have involved only the TWC, and not the IRS, and dental services appear to be the focus.  The consequences of misclassifying a worker can be severe, not only involving unemployment taxes, Social Security and Medicare taxes and income tax withholding, but other benefits provided to employees.  These could include health insurance, 401(k) and other qualified retirement plans, and other employee benefit programs.

For example, if the 401(k) plan does not specifically exclude a worker classification such as “hygienist,” and the person is reclassified as an employee, the employer could be responsible for additional contributions to the retirement plan, plus earnings.