“Of the many regulatory things Auctioneers can get caught up in,” Schur said, “this is one of the most disastrous.”
The Department of Labor, just one of four organizations that can come
after parties that may run afoul of the classification, said in 2015
that it recovered $246 million in back wages. That number is in stark
contrast to the previous year’s $79 million recovered, which could mean
the Department is cracking down on the issue.
The Bureau of Statistics estimates that roughly 10 percent of the
workforce (14.4 million people) is classified as independent
contractors. However, the Department of Labor has an estimate of its own
– roughly 3.4 million of them are misclassified and should actually be
considered employees.
Value of “contractor”
The value of classifying someone as an independent contractor is that
the employer is not paying taxes on those wages. Instead, the company
that hires the independent contractor only has to pay the fee, wage or
commission. There is no responsibility for paying overtime, vacation,
payroll taxes, FICA, Social Security – that’s the responsibility of the
independent contractor.
Another perk for the independent contractor is that the person can
deduct mileage, expenses, etc. – anything that falls under the cost of
doing business. That makes it an enticing proposition.
Enthusiasm should be quickly tempered, though, when considering the fact
that if you wrongly bring someone in as an independent contractor,
there are four government agencies that are going to potentially take
notice, perform audits, and levy fines and penalties that can devastate
your business.
“If they find that the misclassification was intentional,” Schur said,
“that may qualify as a criminal offense and result in a prison term,
plus tens, if not hundreds, of thousands of dollars in penalties and
fines.”
The Internal Revenue Service is one agency that will get involved and
hand down its monetary punishment. The Department of Labor can also step
in, and the independent contractor who actually qualified as an
employee is now owed back wages and overtime. Also, the state’s
Department of Revenue can come in and collect back taxes. The state’s
Department of Labor can also get involved and hand down its own fines
and penalties.
“An independent contractor who is misclassified and should be an
employee creates a huge liability to both the company and the
contractor,” Schur said. “Huge liability.”
It’s a problem in the auction industry, Schur said, because so many
contract bid callers work as independent contractors. Some will consider
themselves independent contractors because they work for multiple
auction houses. They may be legitimate contractors, but working for more
than one company is just one of many indicators that they’re not an
employee.
One of the most important aspects of this issue involves control. The
company that hires contractors cannot control them like they would an
employee. Schur said Auctioneers can demonstrate they may qualify as an
independent contractor if they establish themselves as an LLC or other
business entity – there has to be some business structure there, not
just an individual.
Having insurance is recommended, and you must demonstrate that you are
providing a skilled service to multiple clients. You should have the
control to accept or reject assignments as you see fit. There should
also be a contract between the contractor and the employer that
specifically spells out that you are a contractor and not controlled by
the company.
A true independent contractor will bring their own tools to the job, set
their own schedule, and will bill the client instead of submitting a
time sheet. Schur points to the IRS’s independent contractors 20-factor
test to determine if you qualify as a contractor or an employee.
However, he cautions that this is not a fool-proof method of making that
determination.
“It’s guiding principles and nothing more,” Schur warns. “You’re always at the mercy of the investigator.”
In the 20-factor guidelines, the IRS says that if a worker performs
services in the order or sequence set by the person for whom the
services are performed, that shows the worker is not free to follow his
or her own pattern of work, which indicates they are employees rather
than contractors. However, investment in facilities, such as tools used
on the job, would indicate that the worker classified as an independent
contractor.
IRS Topic 762: Independent Contractor vs. Employee
The IRS weighs in on the issue with “Topic 762 – Independent Contractor
vs. Employee,” saying that, “you should consider all evidence of the
degree of control and independence in this relationship. The facts that
provide this evidence fall into three categories – Behavioral Control,
Financial Control, and the Relationship of the Parties.”
• Behavioral: Does the company control or at least have the right to control what the job is and how the worker does their job?
• Financial: Are expenses reimbursed? Are tools provided or does the
contractor bring in their own? Are the business aspects of the job
controlled by the payer?
• Relationship to parties: Has a contract been written describing the
relationship? How permanent is the relationship? Does the business offer
employee-type benefits?
For 30-plus years, Schur’s company hired an independent contractor to
sell cars at an impound auction. The contractor came in with his own
truck, microphone, experience, etc. The seller set the auction time, so
Schur’s company was, in theory, in the clear on that account, too.
However, he’s in no hurry to bring in outside help as a contractor if
there is even the slightest doubt.
“Don’t gamble if you’re an employer,” Schur advises. “If you’re in
doubt, make them an employee. It’s a heck of a lot cheaper than going
out of business. When in doubt, contact your attorney or tax
professional.”
*Ed. note – Prior to working in the auction industry, Schur earned
his senior professional in human resources (SPHR) designation, and ran
an HR consulting company.