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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Employee Becomes Treated as Independent Contractor

(Posted June 3, 2002)

Question 190: I used to be a W-2 employee. My employer told me that I am now a 1099 independent contractor. The work performed will not change. I will continue to take direction from the employer as to what work is to be performed and on what basis of priority it is to be performed. I will keep my office but I can work from home if I like and I may also set my own hours (within the framework of impending deadlines). I must still attend our frequent staff meetings. I have use of all company supplies and office equipment. So, am I really an independent contractor, or just another "employee" in disguise?

Answer: Probably you're still an employee, but it bears a closer look.

I view unilateral changes such as this as particularly suspect. If you were an employee before, there had better be some real changes in the situation before I'll believe you're now an independent contractor. Your company has tried to make some changes to show you are independent, such as giving you some flexibility in hours and location, but you are still essentially under their control, both in terms of how you do your job and how you are paid for doing it.

I give several examples of this in my book Who's the Employer as I discuss the use of an independent contractor agreement in close situations:

Outsourcing is a modern business practice particularly affected by these agreements. An employee goes off the payroll, but is immediately hired back as a "consultant." The worker signs an independent contractor agreement. The company no longer withholds taxes, and gives the worker a 1099. Such an agreement may or may not be relevant. Consider these examples:

Outsourced secretary. Ethel, a secretary, has been told that the company has decided to outsource her job. She is off the payroll, but can come back to work as an independent contractor. She receives no benefits. Her pay will increase 15% per month (which is less than what the employer is saving in payroll taxes and benefits). She signs an independent contractor agreement, and performs the same jobs, at the same times, with the same control as before. Ethel is still an employee. The independent contractor agreement will be disregarded.

Outsourced attorney. Portia, an attorney, has left her law firm. However, they don’t have anyone in her specialty, and so continue to use her to handle client business in that area. They let her use her old office to handle their client’s work, which will be typed by their secretaries. She pays her own malpractice insurance, continuing education fees, etc. She also sets up a home office, from which she works on her own clients, and occasionally works on clients of the old firm. This is a closer situation which could be argued either way. The independent contractor agreement helps tip the scales in favor of independent contractor status.

Retired executive. Zeke has worked with Old Line Stores for many years, and has reached retirement age. He chooses to retire, and is taken off the payroll. However, he stays at Old Line as an independent contractor consultant to train his successor and to perform his old job until his successor is trained. The company furnishes him with office space, reimburses his expenses, etc. Zeke is still an employee and has never separated from service. [Rev. Rul 55-695, 1955-2 CB 410.]

Frankly, your situation sounds a lot more like the first situation than the second. However, there may be other factors involved.

You can file Form SS-8 with the IRS to ask them to look at your status and determine whether you are independent. You may wish to speak with an attorney in your area; there may be local labor law issues involved. Either way, don't expect to be overly popular with your company.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.