Security Business

MAR 2014

Find news and information for the executive corporate security director, CSO, facility manager and assets protection manager on issues of policy, products, incidents, risk management, threat assessments and preparedness.

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20 | SD&I | March 2014 ecurity providers can hire employees and independent contractors, and the rules for each can differ. "Employees" are subject to a wide array of state and federal tax requirements. There also are complex and burdensome recordkeep- ing and reporting requirements. On the other hand, these requirements do not apply to inde- pendent contractors, providing an incentive to classify workers as independent contractors. Businesses that wrongly classify employees as independent contractors, however, face signifi- cant tax and related liabilities. Initially, the employer determines if a worker is an employee or an independent contractor. The decision is subject to review by government agencies including the IRS, the Department of Labor, the employer's state tax department, and state authorities that administer unemployment and worker compensation. The more "employ- ees," the more that must be paid to these agen- cies. Employers withhold and pay taxes from employees' pay; however, independent contrac- tors pay their own taxes, and the government bears the risk that the contractor will properly report income and pay taxes. Determining the Worker Type The IRS tests to determine if a worker is an employee or independent contractor by focus- ing on financial controls, behavioral controls and the relationship between the parties. Financial controls look at whether the worker has an effect on financial decisions: Does the worker have a significant investment in tools or other assets? Unreimbursed expens- es? Is the service performed exclusively on the employer's behalf? Can the worker realize a profit or loss or does get paid no matter what? Behavioral controls look at whether the employer has the right to direct and control how the worker performs the job. Control is not what is important — the right to control is enough, even if it is not exercised. The more control, the higher the likelihood the IRS will classify the worker as an employee. The right to control exists where the employer has the right to tell the employee: where to do the work, what tools to use, what must be com- pleted, and the order in which it must be done. The relationship test focuses on the con- nection between the employer and worker. Is there a written contract stipulating terms and conditions? Are there benefits such as vacation pay, healthcare benefits, pension benefits or other benefits typical of employment? Again, does the worker perform services solely for the employer or earn income from others? Impact on your Business Both the Department of Labor and IRS are stepping up enforcement, with random audits, and levying financial penalties for violations of the classification rules. States are also get- ting into the act with new laws penalizing employers for misclassifying workers. Take steps to protect your interests. If you use independent contractors, they should incorporate. Sign a written contract with their company. Make sure the independent contrac- tor purchases liability insurance and names you as an additional insured. If you use inde- pendent contractors to sell residential security systems, you may be protected under an IRS safe harbor applicable to door-to-door sales- men; however, it does not apply to installers. Proceed carefully and make sure to include knowledgeable professionals when structur- ing your relationship. ❚ Eric Pritchard co-chairs the electronic security group of Kleinbard Bell & Brecker LLP. This column does not consti- tute legal advice; contact an attorney with specific questions. Worker Classifcation Understanding the difference between "employees" and "independent contractors" S LEGAL WATCH By Eric Pritchard " If you use independent contractors to sell residential security systems, you may be protected under an IRS safe harbor applicable to the sales of consumer products by door-to-door salesmen." SDI_20-21_0314 Legal Watch Pritchard.indd 20 3/5/14 1:27 PM

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