Is My Arizona Worker an Employee or an Independent Contractor?
September 6, 2021
Is My Arizona Worker an Employee or an Independent Contractor?
Julio has a successful construction firm in Snowflake, Arizona involved in home renovations. At any given time, Julio and his crews may be working on a dozen or more houses – renovating kitchens, tearing out and replacing dated bathrooms, and updating electrical systems.
Julio views those crews as independent contractors. He doesn’t withhold income tax or pay Social Security, Medicare taxes, unemployment taxes, or workers’ compensation premiums.
But recently he has received an inquiry from the Internal Revenue Service, which has reason to believe Julio has been misclassifying some of these workers as independent contractors.
Misclassification of a worker is a serious legal matter that can result in fines and penalties, as well as payment of the employment taxes that were not paid. Julio is, understandably, nervous about the situation.
Arizona utilizes a “right to control” test to determine whether a worker is an employee or an independent contractor. Hunt Bldg. Corp. v. Indus. Com’n of Arizona, 148 Ariz. 102, 105-106 (1986). Specifically, an employee is considered to be an “independent contractor” if he is not subject to rule or control of the person for whom work is done, except in accomplishing a certain result. Ocean Accident & Guarantee Corp. v. Kennison, 42 Ariz. 349, 26 P.2d 113 (Ariz. 1933).
This position aligns with Internal Revenue Service guidance, which recites that the major indicator of whether a person is an employee or an independent contract is the degree of control and independence between the payer and the worker.
If Julio has the right to control or direct only the result of the work, not what will be done and how it will be done, the person doing the work will likely be considered to be an independent contractor. Each situation has its own specific facts that must be analyzed. It is helpful to look at other behavioral and financial controls, as well as the dynamics of the payer-worker relationship to help with a determination.
A worker is likely an employee when the payer or company has the right to behavioral control, such as time and place to work, work hours, type of work performed by the worker, even if that right is not exercised. You should consider the following when making an evaluation:
– Does the “payer” specify when and where the work is to be performed, what specific tools to use, and whether to go to Home Depot or Lowe’s? The specificity of these instructions could lead to a conclusion that the worker is an employee.
– More detailed instructions may indicate that the worker is an employee. Less detailed instructions reflect less control, indicating that the worker is more likely an independent contractor.
– Does the payer train the worker? If yes, this is often strong evidence that the worker is an employee. Independent contractors generally have engaged in training on their own.
A worker is likely an employee when the payer has the right to direct or control the financial aspects of the worker’s job.
– Can the worker seek out and bid on other jobs? If so, the worker is likely an independent contractor.
– Is the worker paid for the job by a flat fee? If so, the worker is more likely to be an independent contractor; employees are generally paid a regular wage by the hour, week, or other period of time.
The courts and IRS will also look closely at the interaction between the payer and the worker.
– Is there a written contract that describes the relationship the parties intend to create? Although a contract stating the worker is an employee or an independent contractor is not definitive to determine the worker’s status, it will be used as one of the factors taken into consideration in the analysis.
– Does the worker receive benefits from the payer, such as health insurance, paid vacation, and sick pay? If so, the worker is probably an employee.
– How permanent is the relationship? An expectation between the parties that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
In the case of Julio, here are some examples:
Example 1: The workers that perform electrical work for Julio’s renovations are skilled technicians. They decide how to perform the work, including whether to add new circuits and circuit breakers. They purchase all the necessary equipment with their own cash or credit cards and are free to bid and contract for other jobs with home renovators other than Julio.
It is likely that the IRS and Arizona would deem these workers to be independent contractors.
Example 2: Julio’s workers who demo and install new bathrooms work an 8-hour workday and are paid by the hour. They are provided healthcare insurance and paid vacation time. When they have to purchase supplies at the local home improvement store, they use a company credit card.
It is likely that the IRS and Arizona would deem these workers to be employees.
Consequences of Misclassifying an Employee
The misclassification of workers has become a heightened area of prosecution by both state and federal agencies. If you classify an employee as an independent contractor with no reasonable basis for doing so, you may be liable for various employment taxes for these individuals, as well as fines and penalties.
Contact Counxel Legal Firm
Whether to classify your workers as employees or independent contractors needs to be a properly analyzed decision based upon the legal principles set forth above. We can help you with the proper analysis to keep your business legal. Contact Counxel Legal Firm at 480-536-6122 or at email@example.com.
This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact firstname.lastname@example.org or 480-536-6122 to request specific information for your situation.
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