Our discussion on independent contractors versus employees in the livery business continues! Over the past few weeks, we have gone over the definitions of both independent contractors and employees, discussed two types of livery services and even discussed the complicated “grey area” that comes about when both services overlap.
To follow up last week’s discussion of questions that the IRS may ask to work through the “grey area”, we would like to talk about a common law factor test in which the IRS developed in order to establish independent contractor status.
Within this test, two critical factors were identified:
1. Significant investment; and
2. Realization of profit or loss
If both critical factors are absent, the rest indicates that a driver is an EMPLOYEE and no further analysis is necessary. If both critical factors are present, the driver may be an employee or an independent contractor. If this is the case the analysis must proceed to a second level of “significant factors.”
The second level would be the IRS 20-factor, a right-to-control test that is used to assess an employers’ tax liability. In some states, a similar test is used to determine status under workers comp laws. Also, it is often used by courts to determine independent contractor status in other circumstances. Essentially, the economic realities test makes it harder to classify a worker as independent contractor because, in addition to considering the degree of control the employer exercises, it takes into account the degree in which the workers are economically dependent on the business.
However, in 2004, a scarcely noticed amendment changed the Commonwealth of Massachusetts’ standard for determining whether an individual is an employee or an independent contractor. Be sure to come back in the coming weeks to learn more about this. You won’t want to miss it!