Independent contractor vs employee Associations sometimes see an advantage in classifying a person performing services as an independent contractor, rather than an employee. Employers do not have to pay Social Security, Medicare, and FUTA taxes on independent contractors, nor do they have to withhold federal income taxes for these individuals. However, if misclassified, there can be adverse tax and other consequences to the association, if that person is later determined by the IRS to be an employee. An employer is a person or entity that hires the services of another, either as an employee or as part of an independent business. An employee is a person who is hired to provide services to a company on a regular basis in exchange for compensation and who does not provide these services as part of an independent business. Independent contractor is an individual who works for an entity that has the right to control or direct only the result of the work and not what will be done and how it will be done. Independent contractors are self- employed. IRS 20-Factor Test The IRS 20-Factor Test on employment status is an aid to determine if an individual is an employee under the common law rules. The common law rules provide that anyone who performs services for an employer is an employee if the employer can control what will be done and how it will be done. This is so even when the employer gives the employee freedom of action. What matters is that the employer has the right to control the details of how the services are performed. However, there is substantial discussion over when an individual is an employee The Fair Labor Standards Act (FLSA) sets basic minimum wage and overtime pay standards and regulates the employment of minors. There are several employment practices that the FLSA does NOT regulate, such as: ● Vacation, holiday, severance, or sick pay. ● Meal or rest periods, holidays off, or vacations. ● Premium pay for weekend or holiday work. ● Pay raises or fringe benefits. ● A discharge notice, reason for discharge, or immediate payment of final wages to terminated employees. The FLSA does not provide wage payment or collection procedures for an employee’s usual or promised wages or commissions in excess of those required by the FLSA. However, some states have laws under which such claims (something including fringe benefits) may be filed. Tax classification According to the FLSA, employees are classified as non-exempt or exempt: ● Non-exempt (hourly) employee is one who is paid for each hour worked and receives overtime pay (1.5 hours pay for Separation from employment Termination of employee employer relationship An employee or the association can terminate their relationship in one of four ways: ● Retirement. ● Voluntary separation (e.g., leaving for another position in a different company). ● Layoff (temporary suspension of employment. A laid off employee may be called back to work. ● Dismissal. Although dismissing an employee is often difficult, it may go more smoothly if the community association has a progressive FLSA regulations Fair Labor Standards Act
and when they are a contractor. It is for this reason that the IRS established a helpful list of 20 factors to assist entities in making that determination. The IRS uses the 20 factors to determine whether a recipient of services has enough control over a worker to be an employer. They are intended only as a guide to determine if there is sufficient control to show an employer-employee relationship. The IRS notes that the importance of each factor depends on the specific case, as well as the industry and type of services being provided. An association manager should review these factors carefully, and seek assistance from the association attorney or CPA, as necessary. Because of the continuing controversy surrounding the classification of workers as independent contractors instead of employees, an employer should review the 20 factors. If a worker is an independent contractor, the employer does not need to withhold income or payroll taxes or pay the employer’s portion of FICA taxes. Nor are they generally required to provide health insurance and other employee benefits. If a worker is determined to be an employee, after having entered into a contract with the entity, the employer may be responsible for back taxes and, possibly, employee benefits to which the individual was entitled. In recent years, many businesses (including associations), feeling the crunch of the recession, began identifying workers as independent contractors. The IRS recognized the classification issue as a problem and pursued those companies that overused professional consultants. It is therefore important that associations seek professional advice before classifying individuals as contractors. every overtime hour worked) for hours in excess of the regular workweek (usually 40 hours). ● Exempt (salaried) employee receives a specific minimum salary regardless of the number of hours necessary to perform the job. This type of employee, also referred to as a job-basis employee, is ineligible for overtime pay. There are five categories of exempt job duties, referred to and defined by the Act as executive, professional, administrative, computer, and outside sales. Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempts certain employees performing computer related duties. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than the minimum required by law, per week (this amount may change from time to time and should be checked with the accountant). Job titles do not determine exempt status. For an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the department’s regulations. discipline system and has established dismissal policies and procedures. Progressive discipline system A progressive discipline system (PDS) is a system of penalties imposed on an employee who repeatedly fails to meet the standards of the organization for each time an employee is disciplined. Typically, the progression is from verbal warnings to written warnings to suspension to termination. The aim of a progressive discipline system is to provide sufficient time and information for the employee to improve their performance.
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Book Code: CAMFL1524
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