The statutes and underlying causes for reclassification related to Control, both operational and fiscal are rather objective in nature. Determining whether or not an individual or individuals are integral to a business requires investigators to perceive things more subjectively. Our fourth cause of reclassification – entrepreneurialism (more appropriately – a lack of entrepreneurial traits from and within ICs) is even more subjective in nature.
Over the past few decades as the use of independent contractors has extended beyond traditional fields like construction, companies have become more and more savvy with regard to the laws. They’ve innovated and been able to achieve their operational goals without controlling the workers. As such, the regulatory agencies tasked with overseeing this issue have evolved. They have begun to more closely examine the contractors themselves to determine whether or not individual contractors display common characteristics of business owners and entrepreneurs. Do they advertise their business? Do they have business cards? Do they hire help? Do they understand what it means to be in business for themselves?
Those are just some of the questions an auditor may ask during an investigation. None of those questions require any specific answer for many individuals who clearly operate their own businesses. For example, we use several outside parties from time to time. Our primary employment tax consultant has operated independently for more than a decade. He has no website. He carries no business cards. You can’t find his business in a directory. Based on what most agencies are doing in 2018, he would fail the entrepreneur test for several reasons. However, no one would conclude that he is an employee of any company, based on all of the information available.
As a business owner relying on contractors for a significant or primary part of your labor force, the level to which your contractors understand and exhibit entrepreneurial traits is important. One might argue it is the best reason a company should use a third-party administrator like DDI. We have programs in place to educate and incentivize contractors to make entrepreneurial decisions about their business, which solidifies their classification as contractors, but also produces a more nuanced, professional and sophisticated worker.
Suggestions from DDI to avoid reclassification because of Entrepreneurialism
- Encourage contractors to advertise their services. Social media pages and business cards are inexpensive, yet effective.
- Talk business with contractors. Educate them and allow them to provide top-level feedback.
- Consult with DDI about things you can and your contractors can do to be create a more sophisticated relationship.
As always, if you have any questions about the content of this topic or any compliance-related items, please contact DDI today!
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4 Causes of Reclassification
When the referee (auditor) determines that the company is asserting a significant (significance is subjective) level of control over what the contractor does and how he/she does it, this indicates that there is an employer-employee relationship and the referee can throw a flag.
When the referee (auditor) determines that the company maintains too much power over the financial aspects of the contractor’s business, it is indicative of an employer-employee relationship and the referee can throw a flag.
Law of Integration
When the referee (auditor) determines that the contractors in question are integral to the success of the company’s business, it indicates that the company has an interest in controlling the workers and therefore workers are presumed to be employees and the referee can throw a flag.
When the referee (auditor) determines that the contractors in question do NOT exhibit traits of a business owner, they have the authority to reclassify those contractors.