More Action on Worker Classification from the Tax Courts

This week, two tax cases once again highlight employers’ need to ensure that they are appropriately classifying their workers as either employees or independent contractors. As detailed in previous blogs, these classifications impact the rights and benefits that workers enjoy in a number of different ways from their entitlement to workers’ compensation to protection of the various federal anti-discrimination statutes and the right to organize and join or form a union. But those classifications have important tax consequences for employers as well. And as our “gig” economy grows, the once-clear line between employees and independent contractors has become harder to define.

The tax court first addressed the treatment of business owners as employees or independent contractors. In Redi Foundation, Inc. v. Commissioner, Mr. Abraham had over forty years of experience as a real estate developer and had written multiple books on real estate development. He also held seminars on real estate development throughout the country. He later developed an online course on real estate development that was offered to the public through his company. As an officer of a corporation, Abraham would generally be classified as an employee for employment tax purposes, although there is an exception for an officer who does not perform any services or performs only minor services and who neither receives nor is entitled to receive any remuneration for those services. However, when services performed by a corporate officers are responsible for all of the corporation’s income and the officer is paid for those services, the officer is an employee. Because Abraham provided services for the company that constituted its entire source of income and he was paid for those services, he was an employee and was to be treated as such for tax purposes.

Additionally, in Pediatric Impressions Home Health, Inc. v. Commissioner, PIHH was engaged in the business of providing at-home private duty nursing services to children with special needs. PIHH hired nurses to perform these services on its behalf. PIHH did require nurses to complete a written job application, pass a background check, and complete a nursing skills assessment. PIHH also verified the nurse’s credentials, ensured the applicant did not have any professional infractions, checked his or her references, and confirmed that he or she was adequately trained. PIHH supplied the nurses with a contract for services and normally informed them that they were “employed” on a “full-time” basis. It also set the nurses’ work schedule and controlled other aspects of their work. In 2016, PIHH began treated many of its nurses as independent contractors and made no deposits of federal employment taxes in the following years with respect to those nurses. Ultimately, the tax court held that the nurses were not in business for themselves as a matter of economic reality and were in fact common-law employees, and, that PIHH did not act reasonably in classifying the nurses as independent contractors, thus disqualifying them from special relief available to businesses that misclassify their workers as independent contractors.

These two cases provide further evidence that the distinction between employees and independent contractors remains a hot topic in employment law. Once again, companies should review the realities of their relationships with their workers to ensure that their workers are properly classified. In particular, independent contractor agreements should not use workers like “employee,” “employer,” or “employment,” if the relationship is truly meant to be an independent contractor relationship. And, as was the case in PIHH, if a company is going to change a worker’s classification from employee to independent contractor, it ought to have a clear explanation as to why this was done or how the relationship changed.

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