Control determines independent contractor status

Charlene Evans knew the thick envelope from IDES was bad news before she opened it. She was right, even though the payroll audit the letter announced eventually resulted in a fine of less than $50 for Evans' North suburban specialty manufacturing firm.

"(The audit) was very invasive," Evans says. "They looked at every single check, not just payroll. They wanted to see if we had made payments to other individuals, what they called 'hidden people.'

"They were here all day."

Employers know IDES, the Illinois Department of Employment Security, as the place to send required unemployment insurance payments. More serious contact typically involves discussions about whether an individual is an employee or independent contractor.

For an employer, there's less cost dealing with an independent contractor than with an employee: No Social Security-related withholding or matching, for example; no IDES unemployment contributions; no income tax withholdings and payments. But whether an individual qualifies as an independent contractor depends on who makes the decisions on how work is done, not on the company's whim.

"You must have an arm's length relationship," says Chicago employment attorney Wally Liszka, a shareholder at Wessels Sherman Joerg Liszka Laverty Seneczka, PC. "The independent contractor must have an ability to do other work, even for one of your competitors, and the work (should be done) at a different location."

Evans' mistake was hiring short-term help and not bothering to pay the worker through the regular payroll system; there were no IDES contributions or other withholdings from Evans' company.

Evans is a real person and the tale of her business' IDES audit is real, though I've fuzzed her name and business. The irritating issue for Evans, who has an outside firm for payroll and generally keeps meticulous records, was the invasiveness of the audit.

"Even when they saw the same name over and over (in check records), the auditor would say, 'Who's this? What do they do? Can you prove it?'" she complains.

Partly as a result of the audit, Evans no longer hires part-time workers unless they have a FEIN number that establishes the individual as an actual business. The FEIN is a Federal Employer Identification Number, sort of a Social Security number-identifier for businesses. It may not be enough, however.

"The FEIN is helpful," Liszka says. But what matters, he emphasizes, is who sets the parameters for how the work is done.

"Suppose you hire me, a trucker, to get your shipment to California," Liszka explains. "If you tell me what routes to take, where to refuel, what licensure I must have, then you're in control and I'm your employee. But if you tell me to pick up the shipment and get it to California in seven days, then I'm in control. I'm an independent contractor."

• Questions, comments to Jim Kendall, JKendall@121MarketingResources.com.

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