From Barbara Weltman: Big Ideas for Small Business, Barbara does an excellent job discussing the difficulty in determining who an employer is under different laws. Barbara writes:
Being an employer means shouldering many responsibilities toward and on behalf of employees, including paying wages (in compliance with minimum wage/overtime rules), providing safe worksites, providing financial backstops (workers’ compensation/unemployment insurance), handling government reporting, and more.
In simpler times, an employer was easily identifiable. According to the dictionary, an employer is “one who hires others to perform a service or engage in an activity in exchange for compensation.” Today, the application of the employer label is more difficult to determine.
Employer for worker classification
With the growth of the gig economy, more and more people are freelancing. This raises the question of whether a worker is an employee or an independent contractor (is the company engaging the services an employer or not). The IRS uses a 3-prong test derived from common law to determine worker classification:
- Behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial. Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship. Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
If the factors indicate that a worker is an employee, then all of the tax-related employee responsibilities apply.
Employer for payroll taxes
Many small businesses use outside payroll companies to figure withholding, pay employees, deposit payroll taxes with the government, and submit required employment tax forms.
Who is the employer when it comes to payroll taxes: the company using the services of the workers or the payroll company paying the wages?
Clearly the company, with the right to hire and fire, is an employer. But the payroll company may be too. Take the following recent case.
Paychex acted as a professional employer organization (PEO) under a client service agreement with the worksite company. Paychex provided payroll functions and certain human resource functions. Under state law (Florida) and an agreement with the worksite company, Paychex assumed full responsibility for the reporting, collection, and payment of payroll taxes to the IRS. It wanted a refund of some payroll taxes. A district court said that because of the assumption of responsibility — which sometimes meant Paychex would have to advance the cost of payroll when the worksite company’s bank account couldn’t cover it — Paychex could be viewed as an employer (technically referred to as a “statutory employer” in tax law).
The test for employer status here: Who has control over the payment of wages to worksite employees? This control need not be exclusive; the worksite company remained the common law employer.
Employer for FLSA
The federal Fair Labor Standards Act (FLSA) sets minimum wage and overtime pay rules. Last year, the Department of Labor issued an administrative interpretation creating a new joint employment standard for purposes of the FLSA, as well as for the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).
The AI said: “when two or more employers jointly employ an employee, the employee’s hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime pay is due.” It was intended to impact contractors, subcontractors, staffing agencies, and franchisees by imposing compliance requirements on both employers.
Last month, the DOL’s joint employment rule was withdrawn. It does not change the legal responsibilities of the essential employer.
Read the full story at Who Is an Employer? It’s More Difficult to Determine Today – Barbara Weltman