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Who's the Employer?

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

Different Employee Definitions for Different Agencies

(Posted March 1, 1999)

Question 10: Why are the rules different as to the definitions of when a worker is an independent contractor as opossed to a common law employee for IRS rules dealing with social security and payroll tax coverage as compared to rules used by the Department of Labor Wage and Hour Divisions for purposes of when a worker is subject to the overtime requirements and minimum wage requirements? Why don't they use the same definitions for consistent treatment by the federal agencies when dealing with an employer's compliance in this area. Example: IRS says workers are independent contractors thus not subject to payroll tax withholding or employer matching but DOL says they are employees for their purposes thus subject to overtime and minimum wage requirements. Why the inconsistency when they both are looking at the same fact pattern involving the workers?

Answer: An outstanding question, and one better posed to Congress and to the various regulatory agencies.

Seriously, different laws have different purposes, and are written by different committees at different times. I remember my frustration as a law student at seeing in in the text for a tax course that "the word 'gift' is defined differently for income, estate, and gift tax purposes. In fact the difference is so severe, that some have suggested using three different words -- gaft, geft, and gift -- to describe the concept."

While it is frustrating for practitioners, that is part of the environment in which we work. The IRS makes it very plain in their Audit Guidelines, at page 2-24:

State law characterization

State laws, or determinations of state or federal agencies, may characterize a worker as an employee for purposes of various benefits. Characterizations based on these laws or determinations should be disregarded, because the laws or regulations involved may use different definitions of employee or be interpreted to achieve particular policy objectives.

For example, state laws determine whether workers are employees for purposes of workers� compensation and unemployment insurance. Because the definition of "employee" for these purposes is often broader than under the common law rules, eligibility for these benefits should be disregarded in determining worker status.

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.