Worker Classification: How Understanding The Relationship Of The Parties Can Help Prevent Misclassification

Establishing a clear relationship with your workers can help to prevent misclassification and potential audits.

A working relationship has a number of different definitions in our current society as well as an assortment of textbook definitions. Trust me, I looked it up. Typically, we think of working relationships as how well we work with colleagues.

When it comes to regulatory parameters, the term ‘relationship of the parties’ indicates HOW the business and workers work together. Do they have an employer to employee relationship or a client to independent contractor relationship?

Welcome back to our series covering those regulatory parameters. To benefit from the entire series be sure to check out our posts on Behavior Control  and Financial Control. Today’s topic is specifically related to how the IRS determines workers classification as employee or independent contractor.

As with all regulations regarding workers and employees, the goal is to prohibit labeling all workers as independent contractors simply to allow the business to side-step taxes, benefits, and other required employer compliance.

Independent contractors should operate as truly independent of the business, meaning their benefits, their employment, and their income are not dependent or not solely dependent on that business. The regulations at the federal, state, and local level define when a worker can be an independent contractor and when they can be an employee.

So far, we’ve covered behavioral control and financial control as a means to classify your workers.

What is the Relationship of The Parties?

The Relationship of the Parties refers to the connection between your business and a worker providing services.

Essentially, it is the relationship between you as a business owner and your workers.

Take Barbara Business-Owner as an example. Barbara has both employees and independent contractors.

Barbara has a written contract outlining the relationship between her business and Frank Freelancer.

The contract clarified the terms and conditions of their engagement. It outlined the scope of work Frank would need to perform. As well as the project duration, compensation structure, and any other relevant details. These were items that they discussed and negotiated ahead of the contract signing.

A very clear contract formalizing their working relationship helped Barbara Business-Owner to demonstrate her intention to engage Frank as an independent contractor.

Whereas with Emily Employee, Barbara leaned on a job description and predetermined salary when she offered Emily the role. Barbara outlined the training that would be offered, and the hours Emily would be required to work.

How do I document the relationship of the parties for an employee?

Great question.

The contract between Frank Freelancer and Barbara Business-Owner is very different from the employee paperwork Emily Employee had to complete.

In the case of an employee, paperwork maybe items such as:

• An I-9 Employment Eligibility Verification form
• Proof of identity and work authorization
• Instructions to schedule mandatory sexual harassment training, if applicable
• Information on paid sick leave, if applicable
• Eligibility and requirements to apply for benefits the company offers
• Instructions and information on how to report issues within the workplace
• Confirmation of receipt of the employee handbook
• Trainings on how the company operates and expectations of their role

All of this would have to be completed, submitted, and stored securely.

Contrast this with what Frank Freelancer might provide to the same business. In addition to the contract Frank might provide Barbara with some or all of the following documentation:

• Invoices with payment instructions
• W-9 Request for Taxpayer Identification Number and Certification form
• Business formation documents
• Proof of business licensure
• Proof of business insurance

The required documentation is part of what defines the relationship between the worker and the business.

How else can the relationship of the parties be demonstrated?

The duration of the working relationship should be included in the contract between you and your independent contractor.

Independent contractors are generally engaged for specific projects or for limited time periods.

A lack of permanency indicates a higher likelihood of an independent contractor classification.

Closing thoughts

It’s vital to note that the relationship of the parties is one of many factors in classifying your workers. Classification of workers means are your workers 1099 or employees?

You need to take a holistic evaluation of the entire working relationship between your business and how your workers will conduct their work in order to make a decision. It’s important to evaluate behavioral control and financial control, alongside the relationship of the parties.

Inspecting these aspects of your business and your working relationships can be… time-consuming to say the least. But we are here to help. Contact us today to make an appointment to discuss how to properly identify independent contractors vs. employees.

Trust me, we get it…

But you don’t have to do it alone.

ClearPath is a leading Human Resources Outsourcing company focusing on assisting employers to leverage the independent contractor labor market. We’re committed to helping business owners stay compliant and minimize the risks associated with their contingent labor requirements.

No Legal Advice Intended. This article includes general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to contact a lawyer licensed in your jurisdiction for advice on specific legal issues.