So you finally hired an attendant to keep your coin
laundry clean! The attendant has been told what hours to appear for
work, when to take lunch, and has been provided with all of the necessary
cleaning supplies. The attendant will only be performing services
in your coin laundry and will be paid weekly. Those of you who have
concluded that the attendant is an employee rather than an independent
contractor, may go to the head of the class!
If, on the other hand, you pay an individual or company
to periodically clean your coin laundry, and the individual or company
performing the service provides their own cleaning supplies, determines
their own hours and submits a periodic statement for their services,
you most likely are dealing with an independent contractor rather
than an employee.
The amount of control you exercise over the worker
is the principal determining factor as to whether you are dealing
with an independent contractor or an employee.
If you incorrectly characterize your attendant as
an independent contractor, paying no heed to the payroll tax requirement,
and the day comes when you elect to terminate the attendant’s services,
you may be faced with a claim for unemployment compensation and audits
by the Employment Development Department and the Internal Revenue
Service.
It is not unusual to see a coin laundry operator
hire an attendant Monday morning at 9:00 a.m. and terminate the attendant
by noon for unsatisfactory performance. Treating the worker as an
independent contractor, without regard to payroll tax deductions,
may seem to be momentarily expedient, but it will not seem so when
the attendant files a claim for unemployment compensation that very
afternoon!
Your misguided determination as to employee or independent
contractor status will not be binding upon the Employment Development
Department or the Internal Revenue Service. When these taxing agencies
determine that you have improperly treated a worker as an independent
contractor rather than an employee, you may be confronted with audits
by these agencies, under which your former workers will also be classified
as employees rather than independent contractors.
Of what consequence is such a determination? Unless
you can locate these past workers and obtain declarations under which
they state under penalty of perjury that they have paid their taxes,
the government will require you to pay all of the amounts that you
should have withheld for the past three years had you properly treated
these individuals as employees.
If you conduct your coin laundry business through
a corporation, the government will reach through the so-called "corporate
shield" as though it was made of cotton candy. If the corporation
is without sufficient funds to respond, the government will move to
collect the taxes from any "responsible person" related
to the employer. Officers of the corporation, for example, particularly
those officers with any control over funds, are generally considered
"responsible persons" and subject to such tax liability,
regardless of their ownership interest in the corporation.
The Internal Revenue Service has developed a 20-factor
test to determine whether a worker is an employee or independent contractor.
These factors are designed to help determine whether sufficient control,
the principal element, is present to establish an employer-employee
relationship. These factors are as follows:
(1) Instructions. A worker who must comply
with another person's instructions about when, where and how the worker
is to perform, is ordinarily considered an employee. This factor of
control is generally given considerable weight.
(2) Training. A worker required to learn
by working with an experienced employee suggests that the services
are to be performed in a particular method or manner and thus is further
evidence of the control reflective of an employer-employee relationship.
(3) Integration. When the success of a
business depends to an appreciable degree upon the performance of
certain services, the worker who performs these services must necessarily
be subject to a certain amount of control by the owner of the business.
(4) Services rendered personally. Services
rendered personally by the worker would indicate an employer-employee
relationship.
(5) Hiring, supervising and paying assistants.
If a worker hires, supervises or pays assistants under a contract
under which the worker has agreed to provide materials and labor,
and under which the worker is responsible for the attainment of a
result, independent contractor status may be indicated.
(6) Continuing relationship. This factor
indicates an employer-employee relationship.
(7) Set hours of work. If the hours of
work are set by the supervisor, the relationship is more likely employer-employee.
(8) Full time required. If full time work
is required, an employer-employee relationship is indicated.
(9) Doing work on employer premises. Such
activity indicates an employer-employee relationship.
(10) Order of sequence set. If a worker
must perform services in the order or sequence established by the
owner of the business or supervisor for whom the services are to be
performed, this factor demonstrates that the worker is not free to
follow his or her own pattern of work, but must, instead, follow established
routines and schedules.
(11) Oral or written reports. A certain
degree of control is demonstrated by the requirement that the worker
submit regular reports to persons for whom services are to be performed.
(12) Payment by hour, week, month. Such
payment indicates an employer-employee relationship.
(13) Payment of business and/or traveling expenses.
Such payment indicates an employer-employee relationship.
(14) Furnishing of tools and materials.
If the owner of the business provides the tools and materials, rather
than the worker providing his or her own tools, an employer-employee
relationship is indicated.
(15) Significant investment. If a worker
invests in equipment that is used by the worker in performance of
the services such as the maintenance of an office rented at fair market
value from an unrelated party, such a factor would indicate that the
worker is an independent contractor. If, on the other hand, there
has been no investment in facilities, it would appear that the worker
has dependence upon the person for whom services are to be performed
and the existence of an employer-employee relationship is indicated.
(16) Realization of profit or loss. If
a worker has a bona fide liability for expenses such as salary payments
to unrelated employees, the worker would appear to be an independent
contractor.
(17) Working for more than one firm at a time.
If the worker devotes all of his or her attention to one firm, an
employer-employee relationship is indicated.
(18) Making service available to the general
public. An independent contractor relationship would be indicated.
(19) Right to discharge. An independent
contractor can generally not be fired so long as such an individual
produces a result that meets contract specifications; however, if
the person for whom services is to be performed has the right to exercise
control through the threat of dismissal, the worker would appear to
be an employee.
(20) Right to terminate. If a worker has
the right to end the relationship without incurring liability, such
a factor would indicate an employer-employee relationship.
The moral of the story? If you treat your workers
as employees, the Employment Development Department and the Internal
Revenue Service will have nothing to complain about. If you do otherwise,
you may find yourself with a business headache for which there is
no inexpensive over-the-counter remedy!
