Appropriately classifying individuals as employees or independent contractors can be more complex than it appears. One complexity involved in determining independent contractor status, notes Attorney James Coleman, a partner in the Washington, D.C., office of Constangy, Brooks and Smith, is that the Internal Revenue Service (IRS), the Fair Labor Standards Act, Title VII of federal civil rights law, and some state-level regulations each define such contractors in slightly different ways.

Focus, Coleman says, on the big areas of commonality among the laws that define independent contractor status, such as these:

• Independent contractors commonly work for several businesses, not just one;
• They should provide their own tools and resources;
• There should be a low level of control exercised by the hiring entity over the contractor; for example, the focus should be on the contractor’s completed output, and not on how he or she does the work, and particular hours of work should not be dictated; and
• The method of compensation will typically be on a project basis–for a certain amount of product or service–rather than hourly.

An IRS study of misclassification in 1984 found that about 15 percent of employers nationally had wrongly categorized a total of 3.4 million employees. A more recent study, by the Bureau of Labor Statistics, found in 2005 that 10.3 million workers, or about 7.4 percent of the workforce, were classified as independent contractors.

Arguably the strictest definition of independent contractors is that of Massachusetts, created by a 2009 legal opinion: no contractor in that state may perform any work for a company that is similar to work performed by employees. Only such services as plumbing, landscaping, legal advice, and the like qualify as contract work.

“By and large, most workers are properly classified as employees by most employers,” Coleman says. But he agrees that some employers do deliberately declare people independent contractors, because it’s very tempting to save significant amounts of money compared to maintaining employees’ benefits packages and paying payroll, unemployment insurance, and other taxes.

It’s often estimated, for example, that those expenses add at least 30% to an employee’s wages or salary. So, Coleman advises, “If it walks like an employee, talks like an employee, and smells like an employee,” classify the person as an employee. The following resources can help you determine whether an individual is an independent contractor or an employee and provide further details of what constitutes and employer-independent contractor relationship:

• Employee or Independent Contractor? (From Employer’s Supplemental Tax Guide by the IRS)
• Determination of Independent Contract or Status (Progressive) Policy
• Independent Contractor (Standard) Policy
• Model Client-Independent Contractor Agreement
• FAQ: Can an individual be both an employee and an independent contractor for the same company?

Source: HR.BLR.com (http://hr.blr.com/HR-news)