Worker Classification and the Gig Economy

December 28, 2021

The gig economy is here to stay, with many businesses opting out of the traditional employee workforce in favor of on-demand labor. Gig workers provide businesses flexibility without the headaches of payroll and its associated compliance burden. Gig workers themselves benefit, being able to accept or turn down jobs, work their own schedules, and being able to deduct their business expenses, two elements that are not available as employees.  But they do lose out on all of the protections government agencies afford to employees.

They are treated as independent contractors – but are they?

The IRS, Department of Labor, and various state agencies all have their own interpretation of what defines a true independent contractor.  The IRS uses 20 factors to evaluate the worker’s status, with no one factor being more important than another, and no bright line test.  It is in the end the totality of the fact pattern.  Several such factors include:

  • Is the worker’s service a key element of the company’s regular business activity?
  • Does the worker have an opportunity to profit, and does the worker have the risk of loss?
  • Does the worker control the means and method of providing the service?
  • Does the worker receive any benefits such as insurance, vacation or holiday pay?
  • How long has the working relationship been taking place?
  • Does the business have employees performing the same task as the worker?
  • Does the worker hold him/herself out as offering services to the general public?

The penalties for worker misclassification can be steep, even to the point for forcing a business to close its doors. Calling a worker an independent contractor does not in and of itself make it so. Neither does simply issuing a 1099-NEC to the worker. One cannot merely rely on a contract, though certainly having a contract drafted by a qualified attorney is a prudent thing to do. Using an independent contractor labor force as a business model need to be especially careful to structure the relationship so that the day to day facts on the ground point to independent contractor as opposed to employee.

Extreme care and diligence need to be undertaken to increase the chances of surviving a worker classification audit. It only takes one worker to file with the state for unemployment benefits, or with the DOL for back pay/overtime/etc., the EEOC for discrimination, or with the IRS for worker classification determination. The more independent contractors a business has, the greater the risk.

For further information about worker classification matters, please contact Larry Rubin, Aronson’s tax controversy practice lead at 301-222-8212.