The proposed 2011 budget includes a $25 million plan, including the addition of one hundred new enforcement employees, to crack down on the misclassification of employees as “independent contractors.”  This proposal comes at a risky time for employers, as it is estimated that nearly 50% of jobs created during the economic recovery are contingent labor (temps and independent contractors, as opposed to regular employees).  It can be quite tempting to hire “independent contractors” instead of employees.  Employers do not have to pay Social Security or workers’ compensation, don’t have to worry about complying with the FLSA, and don’t have to consider Title VII and the other anti-discrimination laws.  Sounds like a no-brainer, right?  Not quite, especially given the hefty fines and penalties employers can face when they are found to have misclassified.

So how can you tell if you’ve got an independent contractor or an employee?  In the infamous words of the “Hoosier” poet James Whitcomb Riley, “When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.”  In other words, the label an employer slaps on the “contractor” does not matter.  The IRS has published an article to help employers make correct classifications.  The linchpin of the IRS’s inquiry is how much control the individual in question has over her job.  The more control, the more likely it is that independent contractor status is appropriate.

Our advice is to take proactive steps to determine whether your independent contractor classifications are correct.  Better you do it now than the IRS does it for you down the road.