What's the Big Deal About Employees?

 A rose is a rose is a rose; and an employee is an employee is an employee. You may recognize the first part, as an Elizabethan sonnet, the second may not be as familiar. Why do employers go to extremes to avoid having workers called employees? The answer is straightforward. It is simply a lot cheaper. The employer is not only relieved of the burden of having to withhold taxes from the employee’s wages but gone is his responsibility to pay his portion of the Social Security and Medicare tax, which many view as making payments into the abyss. Additionally, savings may be had by keeping these workers out of pension plans, medical benefits and other perks available to employees. The case of the law firm of Donald Cave is illustrative. In that case, a law firm treated its associates and law clerks as independent contractors. The firm sent these workers forms 1099 -MISC. The firm of course claimed that it did not have sufficient control over their work to have these workers called employees. The Fifth Circuit affirmed the Tax Court holding that the law firm exercised sufficient control over the attorneys to show an employer-employee relationship because of the firms ability to affect the course of litigation by its decisions regarding the funding of litigation, work assessments, and working conditions. The firm provided offices, office equipment, secretarial support, business cards, letterhead, access to its law library and legal research services. As to the law clerk involved, the court found that Cave exercised complete control over the assignment of his work for the firm. The law clerk did work for other lawyers and other law firms. However, the Fifth Circuit said that providing services to multiple employers does not necessitate treatment as an independent contractor. When all was said and done, the firm was liable for employment taxes and penalties.Walking the tightrope between employee and independent contractor status is not easy. It helps to have a formal contract setting forth the worker's status but the ultimate test will be to what extent is the worker controlled by the employer. The IRS is on to this issue and will not hesitate to seek taxes and penalties from employers caught in the game of mischaracterizing employees.