IRS Rules Pertaining to Employees vs. Independent Contractors

Human Resource Case Study

a summary of the facts of the case: A consultant named John Engineer took a job with "Make-a-Bed," a furniture manufacture that wished to consolidate its three plants. He wasn't hired as a regular employee, but rather as an independent contractor. Engineer was given a year to come up with a strategy to consolidate the company operations in Maryland, Pennsylvania, and Delaware. He was to be paid on an hourly basis, and was expected to put in 20 hours a week.

A year passed and Engineer had not presented his findings and made no recommendations so the company let him go. He filed for unemployment benefits (saying Make-a-Bed was his last employer) and was turned down; Engineer appealed the decision. In the hearing the HR person admitted it had established an automatic payment system -- as it does for regular employees -- not intentionally but by accident, so it contended that John Engineer was in fact not a regular employee; he did not have FICA payments taken out of his check, nor were there health insurance deductions or vacation pay taken out of his checks, a sign that the HR department clearly stated shows Engineer was not entitled to unemployment because he was not a full time regular member of the workforce.

Question Two: analysis from IRS: In the Common-Law Rules (CLR), independent contractors are "more likely to have unreimbursed expenses than are employees." In the case study, it is pointed out that "John traveled frequently to three factories, but was not reimbursed for travel expenses." This adds to the conclusion that Engineer was not an employee. Also in Engineer's case, he was free to make his services available to other businesses, and he did; and the CLR points out that independent workers are free to consult with other companies in addition to the one they have a business association with.

The IRS notes that an independent contractor is not likely to receive "employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay," and Engineer was not offered any of those perks. Also, there was no "permanency of the relationship" in Engineer's case, making it appear that Engineer was not an employee. Also Engineer was not a part of the "regular business activities" of Make-a-Bed, which helps an objective observer see that he was not an employee.

Something that could have swayed the hearing Engineer's way is that there was no written contract showing that Engineer was an independent contractor -- or otherwise -- and he did have an office in the company's facility. Moreover, he said he was expected to report to HR when he would not be able to come in to the office that was provided for him. However, HR disputes that fact and asserts that Engineer only notified HR at Make-a-Bed out of courtesy, not because the company imposed that requirement on him.

Still, Engineer's case appears to be very similar to Example 5, "Computer Industry"; Steve Smith is working on a one-time project for a company and the company (Megabyte) has provided "no instructions beyond the specifications" -- very similar to John Engineer's position. Engineer was given an assignment and was to come up with a strategy. Smith is an independent contractor. Also, in Example 3, Helen Bach does auto services and the company furnishes space for her but she supplies her own tools, etc. She has her own employees, works her own hours, and is compensated -- but the is an independent contractor, in the same legal sense as Engineer is an independent contractor.

Question Three: Is Engineer an independent contractor. In the preceding four paragraphs this paper points to reasons to justify the fact that John Engineer is indeed an independent contractor. He meets the IRS stipulation in the Common-Law Rules, and it is clear that his attempt to get unemployment from Make-a-Bed will -- and should -- fail.