Besides the IRS and States, you should also be aware of possible conflicts with Federal Regulations.
Independent contractors have successfully filed charges against their clients claiming coverage as an employee under many labor laws including minimum wage, overtime and nondiscrimination laws. Under the following labor laws, the definition of an employee varies, but is generally less restrictive than the law factors used by the IRS:
Safe Havens - Section 530
In the 1970's there was a push to reclassify independent contractors as employees by the IRS, similar to what is happening today. Congress reacted to this by establishing Section 530 of the Revenue Act of 1978. This section established some safe havens that protect businesses from IRS reclassification, provided certain requirements are met.
The Section 530 safe havens have been the source of much controversy over the years. It is important to note that states are not bound by this act and that interpretations by the IRS have varied. The following is a brief overview of the section. Consult your legal counsel before determining if this section might apply to your situation.
Section 530 applies if an employer has:
1. Never treated the individual in question as an employee in the
2. Consistently treated the worker as an independent contractor on
3. Not treated any other workers holding a substantially similar
position to the worker in question as an employee. (Must
consider relationship of parties.)
4. Has a reasonable basis for treating the individual as an
independent contractor. (*Note: The burden of proof has shifted
to the IRS regarding reasonable treatment.) Some of the ways
reasonable basis can be established include:
A. Acceptable precedent
- An employer can establish acceptable precedent in the following
1) A judicial precedent
2) A published IRS ruling
3) An IRS technical advice memorandum pertaining specifically
to the worker
4) An IRS determination letter pertaining to this worker
B. A previous IRS Audit - It is not necessary that the audit
being relied on was for employment tax purposes.
C. Recognized Long Standing Industry Practice - This safe haven
is often very difficult to prove, though it has been used
successfully. This can be a safe haven only if 25% of the
company's industry classifies workers as independent
There are also other less common ways to establish reasonable basis under Section 530. It is important to note once again that the state tax authorities are not bound by Section 530 and will often disregard it.
Commencing after 1996, the IRS must provide written notice of provisions of Section 530 at/or before an audit involving worker classification issues.
The following court cases and plaintiffs complaints illustrate the impact of the use of contingent workers in today's workforce:
Vizcaino et. al. v. Microsoft Corporation ($97M Settlement)
United States Department of Labor (DOL) v. Time Warner, Inc.
Wolf v. Coca-Cola
Casey v. ARCO (Atlantic Richfield Corporation)
Burrey v. PG&E