1099 “Employees”? Workers’ Comp; Yes or No?

In  my interviews with clients during our forensic risk and insurance review process, I often here the term “employee” connected to the reference of IRS form “1099”. In most instances this is not used as a cliché but it is often meant to categorize statutory employees who are paid without employment taxes considered and other statutory requirements that come attached to “W2” employment.

Someone who performs services for you is either an Independent Contractor, (requiring the filing of Form 1099 by the receiving business) or they are an employee. This is pretty straight forward as far as the IRS is concerned even though so many businesses do not pay closer attention to the rules which determine if someone is an independent contractor under those IRS rules:

The first test:

Behavioral Control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.

Financial Control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker's job. This includes:

·        The extent to which the worker has un-reimbursed business expenses

·        The extent of the worker's investment in the facilities or tools used in performing services

·        The extent to which the worker makes his or her services available to the relevant market

·        How the business pays the worker, and

·        The extent to which the worker can realize a profit or incur a loss

 Relationship of the Parties covers facts that show the type of relationship the parties had. This includes:

·        Written contracts describing the relationship the parties intended to create

·        Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay

·        The permanency of the relationship, and

·        The extent to which services performed by the worker are a key aspect of the regular business of the company

So, that 9-5 worker that does not have a written contract for their work and who does not pay any expenses of their work or employment, does not have control over their own “profit or loss”, incurs no expenses and does not make their services available to other businesses, is probably an employee, not an independent contractor.

Now that we know the person you are not withholding any employment taxes from is likely not an employee,   and even if you are able to convince the IRS that this person is not an employee for tax purposes, you need to apply a second separate set of rules to determine if this paid helper is not a statutory employee under Workers’ Compensation statutes. (in this case based on Florida law)

 Second Test: (From Florida Statue 440,)

In order to meet the definition of independent contractor, at least four of the following criteria must be met:

 (I) The independent contractor maintains a separate business with his or her own work facility, truck, equipment, materials, or similar accommodations;

 (II) The independent contractor holds or has applied for a federal employer identification number, unless the independent contractor is a sole proprietor who is not required to obtain a federal employer identification number under state or federal regulations;

 (III) The independent contractor receives compensation for services rendered or work performed and such compensation is paid to a business rather than to an individual;

 (IV) The independent contractor holds one or more bank accounts in the name of the business entity for purposes of paying business expenses or other expenses related to services rendered or work performed for compensation;

 (V) The independent contractor performs work or is able to perform work for any entity in addition to or besides the employer at his or her own election without the necessity of completing an employment application or process; or

 (VI) The independent contractor receives compensation for work or services rendered on a competitive-bid basis or completion of a task or a set of tasks as defined by a contractual agreement, unless such contractual agreement expressly states that an employment relationship exists.

   If none of the criteria listed in  the sub-subparagraph above do o not exist, an individual may still be presumed to be an independent contractor and not an employee based on full consideration of the nature of the individual situation with regard to satisfying any of the following conditions:

 (I) The independent contractor performs or agrees to perform specific services or work for a specific amount of money and controls the means of performing the services or work.

 (II) The independent contractor incurs the principal expenses related to the service or work that he or she performs or agrees to perform.

(III) The independent contractor is responsible for the satisfactory completion of the work or services that he or she performs or agrees to perform.

(IV) The independent contractor receives compensation for work or services performed for a commission or on a per-job basis and not on any other basis.

(V) The independent contractor may realize a profit or suffer a loss in connection with performing work or services.

(VI) The independent contractor has continuing or recurring business liabilities or obligations.

(VII) The success or failure of the independent contractor’s business depends on the relationship of business receipts to expenditures.

c. Notwithstanding anything to the contrary in this subparagraph, an individual claiming to be an independent contractor has the burden of proving that he or she is an independent contractor for purposes of this chapter.

Hmmm… what difference does all this make? Well, if you have two regular employees and decide that you will not obtain workers’ compensation as you are only required to secure that coverage if you have more than 3 employees, and it turns out that your three independent contractors are actually statutory employees, you face fines and stop work orders from the Division. I have known more than one restaurant to experience this problem on a Friday afternoon and unable to resolve it until several business days later. And even worse than lost business income and fines, what if one of those presumed independent contractors suffers a catastrophic injury on the job and you have no insurance coverage to respond to hundreds of thousands of dollars  worth of benefits  due and owning? Then consider just the legal costs of a litigated claim from that independent contractor after a minor or alleged injury. Costly indeed.

I know that many times the motivation for “1099” employees is to avoid the requirement for withholding and for securing and or paying for workers’ compensation insurance.  This decision is very risky, and comes with the potential to be financially devastating.

Think twice and obtain competent advice.