When Does and Independent Contractor Become an Employee?

Guest Editorial

There is a strange phenomenon occurring in the asset recovery industry consisting of deep client involvement in the repossession process related to the control and intrusion in the actual act of the repossession.

For some reason the clients seem to be more involved with controlling the actions of the agent in the field for example the “NO CONTACT” with consumers or third parties dictates. What world do these people live in? Apparently, they have never worked an actual field assignment or they would understand that their absurd directive is an impossible demand. In the field, there will inevitably be times when direct contact with a consumer or third party is not a matter that the agent control, like the wind, it just occurs. Would not it be better to properly train the field agent in the professional and compliant way to deal with direct contact?

Then there is this new software which will track the recovery agency’s agents in the field providing their geographical location to the client… are we Uber drivers? Is this a real case of “BIG BROTHER IS WATCHING YOU”?

The clients and forwarding groups promoting these actions and making these demands should take heed as I fear this control and intrusive action may bring about some unintended consequences when the IRS and CFPB takes a close look at what is being required of the recovery agency and it is my opinion that the “Independent Contractor” relationship might be a thing of the past. With this type of monitoring and control I think the recovery agents will be viewed as “EMPLOYEES” with all the benefits due that befit that designation.

This may not be a bad thing for the field agent but the clients assigning the accounts and setting the parameters should be aware that misclassification of an individual as an independent contractor may have several costly legal consequences. If your independent contractor is discovered to meet the legal definition of an employee, you may be required to:

Reimburse them for wages you should’ve paid them under the Fair Labor Standards Act, including overtime and minimum wage
Pay back taxes and penalties for federal and state income taxes, Social Security, Medicare and unemployment
Pay any misclassified injured employees workers’ compensation benefits
Provide employee benefits, including health insurance, retirement, etc.

If you look closely at the definition of a “Contractor” you will find that the work arrangements governing when to treat a worker as a contractor or subcontractor and when to treat them as an employee are complex and multifaceted. Even the IRS tiptoes around the issue, providing general guidelines rather than rules. Despite the agency’s vagueness, its agents are quite serious about implementing and enforcing regulations concerning whether to treat a worker as an employee or a subcontractor. In general, if a person who performs a service for you makes autonomous decisions about how to perform that work, he can be considered a subcontractor. But if you dictate the terms and specifics of how he works, he’s an employee. For example, if you tell a worker simply to dig up a customer’s yard and let him use any tools he has available, he’s a subcontractor. But if you tell the same worker to use a rototiller and start on the east end of the yard, he’s more likely to be considered an employee. So, when the clients start to dictate how and when you perform the various tasks associated with the repossession process and track your routes and times, I believe the government might view it as now you have now moved into “Employee” status.

With that thought let us take a close look at the definition of Employee, per the IRS. A worker’s status as an employee hinges on three fundamental criteria for determining the extent of control that is exercised over their work. The behavioral criterion covers the way that work is performed, such as the direction to use a rototiller to till the yard. The financial criterion determines control over the financial resources required to get a job done. When an employee drives his own car during performing a job, it’s reasonable for him to expect his employer to reimburse him for driving these miles; however, when a contractor or subcontractor does the same thing, his transportation expense is his own responsibility. In addition, the IRS uses a relationship criterion to determine whether a worker is legally an employee or a subcontractor. The relationship between employer and employee is more complex and extensive than that of business owner and subcontractor, and may include perks such as health insurance and an ongoing commitment to provide a specified number of hours.

The IRS has developed a list of 20 factors it uses to test employee or subcontractor status. The Department of Labor and state boards will normally follow these as well. Here are the twenty factors that a client should be aware of before deciding to call a repossession agent an independent contractor.

I have underlined the areas I see the clients now controlling and which would turn a contractor into an employee.

Does the business require the worker to follow their instructions on how work is to be performed? If yes, this indicates employee status. An independent contractor will generally decide how the project should be completed and use his own methodology.
Does the business provide training to the worker? If you’re hiring a person for a job they are not trained for and providing them with the training to carry it out, that person is probably an employee. There can be exceptions based on the facts and circumstances, but if you fail this test, you might lose no matter how many of the others you pass.
Are the worker’s services a substantial or integral part of the business? This indicates employee status because it indicates the business maintains direction and control over the worker.
Does the business require the worker to perform all services personally? Independent contractors may have their own employees or at least should have the option of hiring other contractors to perform their work. Agreements for personal services indicate employee status.
Does the business hire, supervise and pay the worker’s assistants? If so, this is a strong indication of employee status. Let the independent contractor pay his or her own assistants.
Does the business have an ongoing relationship with the worker? This one is a stretch since many businesses maintain lifelong relationships with contractors whose work they like. But the IRS views this as an indication of employee status.
Does the business set the worker’s schedule and hours? Independent contractors generally set their own work schedules. If the contractor must work certain hours because of required interrelationships with your employees or to take advantage of down time for computer-related work, document these facts.
Does the business require the worker full-time? This is an indication of employee status because the business controls their availability and prevents them from working on other clients.
Does the business provide the workspace? Contractors who work off-site are more likely to be classified an independent contractor.
Does the business determine the order or sequence in which work is completed? Indicates employee status. If specific schedules are required, document them in the contract with the reasoning for doing so.
Does the business require oral or written reports? The IRS believes regular written or oral reports detailing the work completed indicates employee status.
Does the business pay by the hour, week or month? This indicates employee status. See our comments at the end of this article on this issue.
Does the business pay expenses? This is an indication that the business is directing the Independent contractor’s business activities. Make sure the independent contractor pays the expenses and bills you for reimbursement.
Does the business provide tools and equipment for the worker? Independent contractors would normally provide their own tools and equipment.
Does the worker have a significant investment in their own facilities? If the contractor maintains his own office space, computer equipment, tools, etc., this is a good indication that they are an independent contractor.
Does the worker have profits and losses independent of the business? This is an indication that the contractor is running his own bona fide business and is an independent contractor.
Does the worker have multiple clients? Working with multiple clients generally indicates independent contractor status.
Does the worker market their services to the public? Employees do not generally market their services to the public.
Does the business have the right to discharge the worker at any time? This suggests employee status. An independent contractor would only be discharged for failure to meet contract specifications.
Does the worker have the right to quit at any time? An independent contractor is under contract and cannot quit until the project is completed.

What all these factors try to determine is whether an employer has the right to control what a worker does and how and when he or she does it, as well as how much financial risk the worker has taken on for themselves or how much they have invested in their own business. The more control a business has over a worker, the more likely they should be classified as an employee. The more financial risk the worker has in terms of business profit and loss, or the greater their own investment in tools, equipment and facilities, the more likely they are to be classified as an independent contractor. If a person falls into the employee status on more than 8-9 of the IRS guidelines, you should probably play it safe and classify them as an employee.

It now becomes obvious that the more control the client seeks over the recovery agency by dictating work parameters the closer the client comes to that thin line separating an independent contractor from an employee with the burden of taxation, social security, insurance, etc.

I would caution the clients to take a close look at the relationship that they have with their service providers, the dictates and requirements they are putting forth and whether they have created an environment which has turned the independent contractor into an employee… I can assure you the IRS and CFPB are looking closely.