Misclassification of Workers - Proskauer Rose LLP

© 2010 Proskauer Rose LLP
i. In that situation, the IRS generally will apply the 20-factor
common law test.
ii. Similarly, courts have applied the 20-factor test in the
context of employee leasing arrangements.
g. On March 4, 1997, the IRS released a revised version of its Worker
Classification Training Manual (the “Manual”), which provides
guidance to its employment tax specialists and revenue officer
examiners on how to make “impartial” determinations of a
worker’s employment status for federal employment tax purposes.
h. Although the Manual elaborates on certain factors included in the
twenty-factor test, the Manual specifically provides that the twenty
common law factors listed above are not the only ones that may be
important. The Manual provides that the relative weight of each of
the twenty factors can vary significantly depending on the specific
situation under examination.
i. In providing guidance regarding the common law control standard,
the Manual discusses the elements of “behavioral control,”
“financial control” and the “relationship of the parties.”
j. The Manual provides that the relationship of the parties, as seen by
the parties, is important because it reflects the parties’ intent
concerning control. A written agreement describing a worker as an
independent contractor is viewed as evidence of the parties’ intent
that a worker is an independent contractor, but is not dispositive.
k. The Manual states that with respect to a worker who creates a
corporation through which to perform services, (i) the corporate
form generally will be recognized for both state and federal law,
including federal tax purposes, provided that the corporate
formalities are followed and at least one non-tax business purpose
for the corporate form exists (e.g., to limit liability) and (ii) that
disregarding the corporate entity generally will be an extraordinary
remedy. This is a significant change from the draft version of the
Manual released in February, 1996 and was first introduced in the
final version of the Manual released on August 6, 1996. In March
of 1996, the IRS implemented the Classified Settlement Program
(“CSP”). The CSP is a voluntary program that permits businesses
and tax examiners to resolve worker classification cases as early in
the administrative process as possible, thereby reducing taxpayer
burden.
5. Section 530 of the Revenue Act of 1978
a. Section 530 provides a safe harbor for a business if it improperly
classifies an employee as an independent contractor. Under
Section 530, a business can continue to treat its workers as
independent contractors (even if, under the 20-factor test, they