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April 26, 2010
'Independent Contractor' Classification: An Issue at State and National Level
Oklahoma organizations that misclassify employees as independent contractors are the target of new legislation approved by the Oklahoma House of Representatives.

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Senate Bill 1384 would allow three Oklahoma state agencies to share information in order to identify employers who fraudulently classify workers as independent contractors instead of employees in order to evade taxes and workers' compensation claims.

The agencies that would share information are the Oklahoma Tax Commission, the Oklahoma Workers' Compensation Court, and the Oklahoma Employment Security Commission.

Proponents predict the bill will generate state revenue in addition to ensuring workers receive appropriate protections and benefits. Independent contractors are excluded from employee benefit programs and unemployment insurance benefits.

Determining a worker's classification. In general, there are two tests that can determine whether a worker is an independent contractor or employee under federal law.

  1. A "reasonable basis" test provides a "safe harbor" to employers based on existing government or court classifications of workers in a particular business or industry and was mandated by the Revenue Act of 1978 (P.L. 95-600, Sec. 530).
  1. A "common law test" looks at the relationship of the worker and the business.

In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Evidence can fall into three categories: behavioral control, financial control, and the type of relationship of the parties.

Furthermore, some workers who do not meet the reasonable basis or common-law tests for independent contractor status may still be classified as such by operation of law (i.e., statute).

Misclassification on the national agenda. The Department of Labor (DOL) announced that $12 million of its 2011 budget will go towards increasing enforcement of wage and overtime laws involving misclassification of employees.

The U.S. Secretary of Labor Hilda L. Solis addressed the need to "secure minimum and overtime wages and to help middle class families remain in the middle class. Working on the issue of misclassification is key to attaining those goals because misclassification of employees as independent contractors deprives employees of critical workplace protections and employment benefits to which they are legally entitled."

Currently misclassification is not against the law, but its practices often violate labor and tax laws, such as failing to pay employees overtime or minimum wage.

A guide providing more information on this subject, Employee or Independent Contractor? (from Employer's Supplemental Tax Guide by the IRS), is now available.

A model client-independent contractor agreement is also available to our paid subscribers.

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