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What are common law rules to determine employee classification?

While employee classifications -- whether a person is a W2 employee or a contract worker -- seem simple, gray areas often make it difficult for employers to correctly identify workers. Failure to identify workers correctly can result in improper employee tax processes as well as failing to follow laws protecting W2 employees. One way to determine a worker's classification is to follow some common law rules, which are published by the Internal Revenue Service.

The rules look at behavior, finances and the relationship between the company and worker. With regard to behavior, the law looks at how the employer treats the worker. Is there a high degree of control exerted by the employer over how the worker does a job? Contract workers must meet specifications laid out by the employer, but how they finish the work is often left up to them.

Next, the law considers the financial nature of the relationship. For example, in a W2 case, an employer usually has to approve expenses, including those spent on tools or supplies for a job. In a contract relationship, expenses for such items would be the responsibility of the contractor unless spelled out in the contract.

Finally, the law considers the nature of the overall relationship between worker and contractor. If the relationship is ongoing or includes benefits such as insurance policies or pensions, then the law might consider it a W2 relationship.

Even these rules are vague in some cases and can be applied in different ways to different situations. Whether you're a business concerned with correctly upholding the law or a worker who believes he or she has been incorrectly classified, seeking an experienced legal opinion on the matter might make a big difference to issues in the future.

Source: IRS, "Independent Contractor (Self-Employed) or Employee?," accessed Oct. 09, 2015

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