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Federal and State Labor Laws
Whether a worker is an employee or independent contractor can have important tax ramifications. If the worker is an employee then the employer must withhold and pay employment taxes. The employee may also be eligible to participate in benefit plans including insurance coverage and retirement plans.
The federal government has several criteria for who should be treated as an employee. Three factors are considered when determining if an individual is an employee or an independent contractor. These factors are behavioral control, financial control and type of relationship of the parties.
Behavioral control:
The facts must show whether the business has a right to direct and control how the worker does the task for which he/she was hired including:
* When and where to do the work.
* What tools and equipment to use.
* What workers to hire or to assist with the work.
* Where to purchase supplies and services.
* What work must be performed by a specified individual.
* What order or sequence to follow.
Training provided by a business to an individual is a strong indicator that an employee relationship exists. (Look to who has retained the right to control the details of a worker's performance).
Financial control:
The extent to which the worker has unreimbursed business expenses. Subcontractors are more likely to have such expenses in the performance of their jobs. The extent of the worker's investment. The extent to which the worker makes his services available to the public. How the business pays the worker. Subcontractors are usually paid a flat fee for a job. There are exceptions to this rule for professional services. The extent to which the worker can realize a profit or a loss.
Type of relationship:
* Will the written contract be carefully reviewed?
* Are there employee type benefits?
* Is there permanency to the relationship?
To what extent are services performed by the worker a key aspect of the regular business of the company (i.e. laborers working for a contractor, lawyers working for a law firm)?
Connecticut Variation:
Under Connecticut labor law. The test of employee/independent contractor for unemployment tax purposes is different. Under Connecticut law, if the following three items are true then the worker is considered to be an independent contractor.
The individual must be free from direction and control in connection with the performance of the service both under the contract and in fact.
The individuals service must be performed either outside the usual course of business or outside the employers places of business.
The individual must be customarily engaged in an independently established trade, occupations profession, or business of the same nature as the service performed.
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