Behavioral Controls – IRS Worker Classification

This week we look at the behavioral controls that the IRS considers when reviewing classifications of employees versus independent contractors. Watch the video to learn more!

Transcript:

So this is the third in our series, and over the last few weeks, we’ve been talking about the classification of workers in your practice. In other words, are they an employee or are they an independent contractor? And if you remember from a couple of weeks ago, if you get it wrong, the consequences are not fun. I mean, their financial impact, consequences and by the way, this does happen. It’s real, whether it comes from the employee, it comes from a simple IRS audit, or a flag by another entity, or a simple complaint, and you would be surprised at the directions that come. I’ve actually had friends that have inadvertently misclassified their workers as a part of their business and had the financial impact as well as the additional defense costs that are associated. So, please know that the reason why we’re doing this series is because we believe it’s important, because we have seen what the impacts are, and we want you to be aware of exactly what does this look like.

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So this is the third in this series and the third week that we’ve done this. And really, what I want to talk about just a quick reminder, there are 11 factors that the IRS considers. They’re grouped into three primary categories, and that’s behavioral control, financial control, and the type of relationship that are established. Those are the three large categories for the 11 factors that they consider now. And remember, this isn’t a checklist, right? It’s not simple. You can’t just check it off and go, Okay, four to five, then they’re an independent contractor or four to five, then they’re an employee. That’s not how it works. They take into consideration the preponderance of all of those factors in the determination. But, what we have found is there are some, you know, obviously key triggers that definitely begin to push the envelope in some of these areas. Last week, we talked about the physician side of this and how it impacts potential physician independent contractors or employees. So be aware of that.

Now, behavioral control is what we’re going to talk about today, right? So behavioral control, in other words, does the company or the person who’s paying the independent contractor or the employee, do they have the right to control what the worker does and how the worker does their job, instead of just the outcome? That’s a critical component to the analysis under the behavioral control side of things, right? So there are a couple of factors in there. So remember, there are 11 total factors. There are two underneath the behavioral control factor grouping, and under that category is training and instructions. Those are the two factors they look at. So they look at training that the business gives the worker and instructions that they give the worker, right?

So under instructions, we’ll talk about that one. First, the instruction side of things. You could think about it this way, right? It’s when, where, how to do the work, equipment to use, and what workers to hire to help with that work. What work must be performed by a specific individual and what order the sequence that has to happen in the practice? So if you have very regimented processes within your practice and you require that your independent contractors follow those to a T, then that could be another potential trigger. It’s definitely a part of this particular factor, as the IRS looks at your classification of them as an independent contractor in that particular example, right? So now this is really important employees, when you look at it under this particular behavioral category, under the instruction side of things, right? It’s how the works are achieved, how the work is achieved. So the exact process of how that happens, that’s what the employer controls. Now, employee additional examples include specific place hours, office protocols, and standards, all of those things come into play when we start looking at employee versus independent contractor under the instruction portion of the behavioral controls that they look at in that factor.

Now the other one is training, and this is kind of an interesting one because if you think about it, employees can be trained to perform services in a particular fashion, in a particular way. So the more training that’s involved to bring somebody up to speed, the less likely that they will be considered to be an independent contractor, right? Because the more training you’re offering them, then you’re looking for something very specific and more likely that they may be, they may absolutely be an employee. But again, if there are 11 factors, these are just two of them, independent contractors usually use their own methods. In other words, they’re bringing their expertise to the table, right? They bring their expertise to the table. You know, in your house you may hire a plumber, right? They’re bringing in their skill set. You’re not walking them through and teaching them well, let’s be honest. You shouldn’t be although sometimes people watch over the shoulders and tell them what they should be doing. They’re bringing their expertise and they’re actually doing the work. And in your practice, kind of look at it in that same fashion, right? Right? The more training that you give, the less likely that they’re going to be an independent contractor because they should be bringing their own expertise.

Now, when you look at all of those factors together again, these are just two of them, but all of those items within that factor, then it matters. Now, when we start talking about the instructions and training and all of the behaviors, how much ability do they have to practice in other locations? In other words, can they, you know, can they, can they practice elsewhere? Could they see one of your you know, could they see one of your patients in another location? Or can they do the same work that they’re doing for you, you know, off-site? Is that a possibility? The more that they have flexibility and time when they do the work, location where they do the work, and things along those lines. And then the more we move into the potential that they could be an independent contractor. So again, the two factors under behavioral controls, training and instruction. Next week, we’re going to talk a bit more about financial control, and then, followed by types of relationships, we’ll kind of do some summary in there too, and we really want you to be able to be able to nail this and get it right and help your practice out. We’ll catch you next week.