Changing Tax Policy for Growing Nomad Workforce
Whether you call it the nomad workforce, remote workers, or the gig economy, people working from home or remote locations has been an accelerating trend. COVID’s arrival and lockdowns greatly accelerated the trend. Many previous office workers were sent home to work. Some companies are now bringing them back, while others are looking for other ways to address the situation.
Companies in many cases found that workers sent home, contrary to expectations, actually increased their productivity. Those workers in many cases found that they preferred working remotely. They appreciated flexibility in schedules and the convenience of home during their workday.
Even though both companies and workers like this situation, there are issues getting in the way of just adopting policies to let people work from home. The laws as they stand now are forcing employers to make decisions as to keeping workers on as employees or letting them go and hiring them or others as independent contractors.
The FLSA, Fair Labor Standards Act was examined by Congress and determined to be at least a decade outdated when the current labor trends were considered. Requiring putting all labor into 8-hour increments creates problems when it comes to companies keeping up with hours worked that are not in their facilities or under their direct control.
Overtime pay becomes an issue, as employers cannot monitor and verify hours worked by remote employees in many cases. Employees want to be able to take extended breaks for other activities and still turn out the same volume of work. Even if the employer has no problem with that flexibility, by law they must usually verify hours worked. Working families like the work from home setup because they can take time to take children to school and pick them up while still turning out the work.
While employers and employees alike may want to work it out between them, the IRS rules complicate matters. Many employees enjoy their company benefits and they do not want to lose them if that is how they can work from home. Employers would like to cut costs and tailoring reduced benefits or switching employees to independent contractors can be challenging or even impossible. The IRS has 20 tests to determine if a worker is an independent contractori:
- Level of instruction – how much instruction is required for the work. It should be little or none for an IC (Independent Contractor).
- Amount of training – requiring hired workers to undergo company training will usually disqualify them as an IC.
- Degree of business integration – if a worker’s services significantly influence success or operation of the business, they will likely be classified as an employee.
- Extent of personal services – an employer should not require that certain people do the work. The IC should be able to specify how work is done and who does it.
- Control of assistants – the company should not hire, pay, or supervise assistants used by the IC, or they will be reclassified as an employee.
- Continuity of relationship – a continuous long-term relationship between a company and the hired person is likely to classify them as an employee. The IC can have a long-term relationship with multiple projects, however.
- Flexibility of schedule – if a company dictates the workdays or hours of the hired person, they would be classified as an employee.
- Demands for fulltime work – independent contractors should accept ebbs and flows in work schedules. Requiring fulltime work will likely get them reclassified as employees.
- Need for on-site services – an employer-employee relationship is required if significant work is required onsite at the business.
- Sequence of work – too much control of the sequence in which work is required to be performed would indicate an employee relationship.
- Requirements for reports – if a worker is required to provide numerous interim reports of project progress, they may be reclassified as an employee.
- Method of payment – monthly, hourly, or weekly payment would normally make the worker an employee.
- Repayment of business or travel expenses – independent contractors pay their own business and travel expenses.
- Provision of tools or materials – the employer should not provide tools or materials to the worker if they are an IC.
- Investment in facilities – the IC pays for their own work facilities.
- Realization of profit or loss – the compensation of the IC should not be guaranteed by the employer or protected from loss.
- Work for multiple companies – an IC is free to and frequently does work for multiple companies.
- Availability to the public – making their services available to the public or other companies usually means they are an IC.
- Control over discharge – the unilateral power to discharge a worker usually makes them an employee.
- Right of termination – the IC can usually terminate their relationship with the company at will.
Mis-classification of an employee as an independent contractor who fails in one or more of these tests can lead to substantial penalties and interest for employers. Consult with your tax advisor or CPA if you have doubts about worker classification.
Congress is looking into whether some types of hybrid relationships can be devised to work between the extremes of employee or independent contractor to adapt to changing times.