Case study on Independent Contractor and an Employee:

A company’s stakeholders and the employer-employee relationship

A company’s stakeholders are involved in numerous relationships. The definition of the relationship between the employer and employees is one association that causes a lot of confusion. This is particularly true when it is unclear if a worker is employed full- or part-time by the company, whether under a contract, or whether they are only a part-time contractor (Davis-Blake, & Uzzi, 2009). On those grounds, the scenario in question is unclear. It is possible to ascertain the connection between John, the Engineer, and Make-a-Bed Company using the IRS’s rules. Whether John is an independent contractor or an employee of the business will be established using the IRS’s approach.

Background

The case involves a situation where it is not clear if Engineer George was hired as an independent contractor or an employee of the Make-a-Bed Company. The president of the company hired John because he believed that the Company could save more money through streamlining its manufacturing processes and consolidating its facilities. Based on his experience, the company contracted John based on his experience in working on such a project, and since John was still engaged with other clients and would not begin full-time employment immediately, he was hired as an independent contractor by the company. Therefore, John was required to give the company recommendations of the consolidation before the end of the year and was required to report to the president every month, but would manage every part of his work that involved working for the company. However, the conditions of his employment are not clear since according to the president of the company, he was hired as an independent contractor. However, the conditions with which he worked for the company is conflicting. Since he was hired as an independent contractor; whether, through a written contract or a verbal, it can be assumed that John was an independent contractor. The facts of the case are conflicting, and the line is not clear whether John was an independent contractor or an employee of Make- a- Bed.

Analysis

According to the IRS publication 15A section 2, a company needs to understand and clearly define the relation that exists between the business and the person performing the specific services before making decisions on how to treat payments (Davis-Blake, & Uzzi, 2009). Section 2 of the publication stipulates that a person providing services to the company could be an independent contractor, a common-law or statutory employee or a statutory non-employee. A company needs to have a clear understanding of the definition of these categories and vividly define the relationship they have with the person who is providing a service to the company (IRS, 2017).

The definition of an independent contractor according to the IRS

The IRS defines an independent contract as a person who follows an independent trade, business or profession (IRS, 2017). The person offers his or her services to the public and thus cannot be considered an employee. The section gives an example of doctors, lawyers, and contractors. However, when they offer their services to a company, the definition as to whether they are employees of the company or remain to be public contractors depends on the conditions of each case (IRS, 2017). Therefore, the IRS has a general rule that assists businesses in deciding whether a person is an employee or an independent contractor. Consequently, according to the IRS, a person is considered an independent contractor in conditions where the company only has the right to control the results of the task and not the means or the methods that will be used to achieve the results of the case.

Definition of common law employees

Common law employees, on the other hand, are defined as anyone who offers services to the company if the company has a right to decide what should be done and how it needs to be undertaken (Davis-Blake, & Uzzi, 2009). This also applies in situations where the company gives the employee a right to choose how they will accomplish the task. Therefore, the most important factor in defining the relationship is whether the employer has the right to control how the service will be performed (Davis-Blake, & Uzzi, 2009). Therefore, as in the case of Engineer John and Make-a-Bed Company, the label of their relationship does not matter; only the substance of the relationship matters. It, therefore, does not matter if an individual is employed on full-time or part-time basis by the company (IRS, 2017). However, for tax purposes, no distinction is made between the classes of employees and all the staff of the business are treated as employees of the company (IRS, 2017). Also, for tax purposes, any staff who performs minor or no services for the cooperation and is not entitled to any pay is not considered as an employee.

Statutory workers

Further, according to the IRS, statutory workers are any independent contractors and are treated as employees under the statute (Davis-Blake, & Uzzi, 2009). However, they are only put in this category for tax purposes and only happen if they fall in various defined conditions, which do not apply in the case of John and the Make-a-Bed company (Kim, Lee, Lee, & Kim, 2010).

Consequences of treating an employee as an independent contractor

The IRS under miscalculation of employees, states that the consequences of treating an employee as an independent contractor. If a company lacks reasonable explanations for classifying an employee as an independent contractor, the company is liable for employment taxes for the employee and relief provisions for the employee (De Cuyper, & Isaksson, 2017). However, if a company has substantial support claims for treating a worker as an employee, the company may then be relieved from paying employment taxes for the employee. Also the company should not have treated any worker holding a similar position as an employee for any period after 1997 (IRS, 2017).

Factors to determine the relationship between a company and an individual according to the IRS

Therefore, the IRS gives clear guidelines that will help the company determine the relationship between them and the individuals who provide services to them. The IRS states that the relationship must be examined to determine if an individual is an employee or an independent contractor and thus all determining factors must be considered. These include factors that determine the degree of control and independence which are behavioral and financial control and the type of relationship (IRS, 2017). Behavioral controls are facts, which explain whether the company has the power to control the methods used to complete the task. Financial control involves the extent of unreimbursed business expenses where independent employees have many unreimbursed expenses. It is also dependent on extent of the investment made by the worker, the extent to which, the worker makes their services available to relevant markets and the payment terms. Further, on financial control, the independent contractor is liable to a profit or a loss. The relationship is determined by contracts describing the relationship, the benefits provided to the worker by the company, the permanency of the relationship and the extent to which services provided by the worker are a key aspect of the regular business performed by the company (Guest, 2004).

Decision

Based on the analysis of the IRS provisions on the difference between an independent contractor and an employee John Engineer is an independent contractor in this case. Based on behavioral factors of defining the relationship, Make-a-Bed did not have any power to control the operations of John and the methods he would apply to accomplish the task. He was not issued with any instructions and did not receive any training. Under financial control factors, John had many expenses that were unreimbursed, and he used his own tools, making his investment in the task very high. Based on the type of the relationship, John is an independent contractor since the relationship was not permanent and was only meant to last a year. Therefore, based on the laws provided by the IRS, John Engineer is an independent contractor for Make-a-Bed.

Recommendations

The HR needs to ensure various measures are taken to prevent the occurrence of such issues in the future. First, the HR should make sure that they provide written contracts that will be signed by any persons they wish to contract for a certain period. Written contracts are better since they provide solid evidence (De Cuyper, & Isaksson, 2017). Secondly, the HR director should ensure that all relationships that the company has with its workers are well-defined based on the provisions of the IRS to prevent the occurrence of such issues in the future (Kim, Lee, Lee, & Kim, 2010). This will ensure that both the company and the employees are not confused about their terms of service. Thirdly, the HR should ensure that there are no registration errors within the enterprise.

Conclusion

Defining relationships that exist between the workers and the employees of a company is quite difficult. However, the IRS publication 15A- Section 2 provides companies with clear guidelines that are important in defining relationships that exist between the workers and company. The relationship is defined by the extent to which the employer controls how, when and where the task should be completed. In the case of John and Make-a-Bed Company, John was an independent contractor, and thus the claim should be denied.

References

Davis-Blake, A., &Uzzi, B. (2009). Determinants of Employment Externalizations: A Study of Temporary Workers and Independent Contractors. Administrative Science Quarterly, 195-223.

De Cuyper, N., & Isaksson, K. (2017). Employment contracts and well-being among European workers. Routledge.

Guest, D. (2004). Flexible employment contracts, the psychological contract and employee outcomes: an analysis and review of the evidence. International Journal of Management Reviews, 5(1), 1-19.

IRS(2017). Publication 15-A - Main Content Retrieved from https://www.irs.gov/publications/p15a/ar02.html

Kim, H. R., Lee, M., Lee, H. T., & Kim, N. M. (2010). Corporate social responsibility and employee–company identification. Journal of Business Ethics, 95(4), 557-569.