Federal law changes this year have shed new light on employee and contractor classifications. Employers need to take a close look at how employees are classified. As remote work becomes increasingly prevalent, tax professionals face new challenges in navigating the complex landscape of worker classification both for remote staff in our firms as well as when providing guidance to clients. This guide provides a concise overview of the key considerations for determining whether remote workers should be classified as employees or independent contractors.
Understanding Classification Tests
Several tests are used to determine worker classification, each with its own focus. The Common-Law Agency Test, used by federal courts and the EEOC, considers multiple factors related to the employer's right to control the worker. The Economic Realities Test, applied in FLSA cases, examines whether workers are economically dependent on the employer's business. Some states have adopted the ABC Test, a stringent approach requiring all three of its criteria to be met for independent contractor status. The IRS uses its own test, which examines behavioral control, financial control, and the type of relationship between the worker and employer. Additionally, some courts use a hybrid approach, combining elements of common law and economic reality tests.
Applying Tests to Remote Workers
When advising clients on remote worker classification, it's crucial to consider how these tests apply in a remote work context. The level of control exerted by the employer is often reduced in remote work situations, potentially supporting independent contractor status. However, other factors must be carefully evaluated, such as the integration of the worker's role into the employer's business, financial arrangements, skill level required, and the permanency of the relationship. If the company relationship with a remote worker otherwise looks and feels like any other employee relationship in the office, you probably have an employee and not an independent contractor.
Practical Advice for Clients
When clients consider reclassifying remote workers as independent contractors, advise them to review job descriptions carefully to ensure tasks are performed independently with minimal supervision. It's important to compare the remote worker's role to similar on-site positions and consider the worker's preferences, as some may value employee benefits over the potential tax advantages of contractor status. Always assess the potential legal and financial risks of misclassification. A remote flexible schedule in and of itself is not a strong enough argument for an independent contractor classification. Especially with new law changes that make even part-time and seasonal positions difficult to classify as anything other than employees.
Weighing Benefits and Risks
Reclassifying remote workers as independent contractors can offer employers reduced payroll taxes and benefit costs, as well as increased flexibility in workforce management. However, these advantages must be weighed against potential risks, including misclassification penalties, loss of control over work processes, and potentially reduced loyalty and commitment from workers. It will rarely provide long-term benefits to the organization to have workers misclassified.
As remote work continues to evolve, tax professionals play a crucial role in helping clients navigate worker classification. While remote work may offer more opportunities for independent contractor classifications, each situation must be carefully evaluated using the appropriate tests. Always consider the specific facts and circumstances of each case, and stay informed about changing regulations and court decisions in this dynamic area of tax law. By providing informed guidance, tax professionals can help their clients make sound decisions that balance compliance with business objectives in the ever-changing landscape of remote work. In our own firms, remote work can be an important component in a difficult hiring market. However, it’s important not to put our firms at risk by misclassifying our own workers.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.