Who's the Employer?

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.]