Relationship of the Parties
The final category of evidence to consider is that which pertains to the Relationship Between the Parties. It is harder to link the facts in this category to the right to direct and control, than in any other category. As such, the intent of the parties is very relevant in close cases. Written agreements, while not controlling, are relevant regarding intent. Incorporation of a worker is also relevant. Incorporation is only disregarded by the IRS in extreme cases.
Determinations by other State and Federal Agencies
The new materials instruct revenue officers to disregard state laws or determinations of state or other federal agencies when addressing the issue of worker classification. A worker's eligibility for worker's compensation or unemployment should also be disregarded by the revenue officer due to the broad definition of employee contained in other laws.
Termination
Further evidence of the IRS's kinder gentler approach to the worker status issue is the Service's de-emphases on evidence that relates to the termination of a relationship between relevant parties. In the past, the IRS took the position that any relationship at will was evidence of an employer-employee relationship. However, the new training materials advise revenue officers that in today's business climate an employer may not be able to freely discharge without notice and/or severance pay, or may be limited by law in some other way. Conversely, independent contractors may enter into short-term contracts for which non-performance remedies are inappropriate.
As a result of factors that exist in today's business climate, presence or absence of limits on a worker's ability to terminate a relationship, by itself, no longer constitutes useful evidence regarding worker status. Revenue officers are instructed that termination evidence should be used by the IRS with great caution. However, a business's ability to refuse payment for unsatisfactory work continues to be characteristic of the independent contractor status of a worker.
Term of the Relationship
Additional evidence the revenue officer must consider within this category is that which relates to the term of the relationship between the relevant parties. An indefinite term is usually evidence of an intent to create an employer-employee relationship. Conversely, a term comprised of a project or for a specific period is usually evidence of independent contractor status. However, the new materials instruct revenue officers not to confuse an indefinite term with a long-term. A long-term relationship can exist between a business and either an independent contractor or an employee. As a result, a long-term relationship that is not indefinite is a neutral fact.
Regular business activity
One of the factors that businesses almost always lost to the Service under the 20 Factor Test was the Internal Part of the Business factor. Rarely will a business associate with independent contractors who do not perform services related to the purpose of the business. As a result, the Service almost always claimed this factor in favor of reclassification. However, the Service appears to be shying away from its previous position on this factor. The new training materials emphasize that the mere fact that a service is desirable, necessary, or even essential to a business does not mean that the service provider is an employee. The focus must be on direction and control because it is possible for work to be performed that is part of the principal business, yet it is performed by independent contractors. Revenue officers are therefore instructed to examine the facts for evidence of direction and control.
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
