“Worker classification” is the term used for the process of identifying which workers must be treated as employees of your organization, and which workers must be treated as legitimate nonemployee independent contractors. Worker classification cases are a major focus for the IRS and for many state governments as well, and there is cooperation among federal and state agencies to enforce the correct classification and tax treatment of payments to workers.
The correct classification of workers determines whether payments to them belong in your Form 1099-MISC tax reporting file or belong in Payroll.
The classification is not chosen by employees, independent contractors or the employer/payer entity. Instead, determining whether a worker is an employee or independent contractor requires an analysis of the relationship between the worker and the organization that hires him or her. Specific factors for this analysis are provided by the IRS. They fall into three categories, and a preponderance of evidence (not any particular fact) determines the outcome:
- Facts that provide evidence of the degree of behavioral control the payer has over the worker. Does the company control or have the right to control what the worker does and how the worker does the job?
- Facts that provide evidence of the degree of financial control the payer has over the worker. Are the business aspects of the job controlled by the payer; what determines how the worker is paid; are expenses guaranteed to be reimbursed; who provides tools or supplies?
- Facts that provide evidence of the intended type of relationship. Is there a written contract; are any benefits provided to the worker?
New Maine legislation, effective December 31, 2012, establishes a definition of “independent contractor” for purposes of Maine employment security and worker’s compensation law. The new law also imposes penalties on employers that knowingly or intentionally misclassify workers as independent contractors in order to evade Maine law. Under new 39-A MRSA section 102 subsection 13-A, an independent contractor is defined as a person who:
A) Performs services free from direction and control over the means and manner of providing the services, subject only to the right of the person or entity for whom services are provided to specify the desired result;
B) Furnishes the tools and equipment necessary to provide the services;
C) Operates a business that is considered inseparable from the individual for purposes of taxes, profits and liabilities;
D) Exercises complete control over the management and operations of the business;
E) Exercises the right and opportunity on a continuing basis to perform the services of the business for multiple entities at the individual’s sole choice and discretion.
Under a revision to 26 MRSA section 1043, services performed by an individual for remuneration are considered to be employment unless and until it is shown to the satisfaction of the Maine worker’s Compensation Board that the individual is an independent contractor who meets the specifications we have listed as A, B, C and D above.
Under new 26 MRSA section 591-A, an employer that intentionally or knowingly misclassifies an employee as an independent contractor may be adjudged guilty of a civil violation for which the penalty is $2,000 to $10,000 per violation.