Q: I want to hire an experienced agent who will work from home on a commission-only basis. The agent will have a lot of day-to-day autonomy, but there might be times when the agent must work in our office as a backup. Am I correct in assuming that, because the agent will mainly work at home or work on commission, I can classify the agent as an independent contractor rather than an employee, without running the risk of having the Internal Revenue Service (IRS) or a state government agency reclassify the agent as an employee?
A: Just because the agent works at home, or just because the agent is paid on commission, it does not follow that the agent is an independent contractor (IC). Lots of at-home workers are employees, and lots of employees are paid on a commission basis.
What distinguishes an IC from an employee for IRS purposes is not the location of the work or the payment formula. Rather, to determine whether someone is an IC or an employee for withholding tax purposes, the IRS looks at three categories of evidence: behavioral control, financial control and the facts of the relationship.
The relationship must pass muster in all three categories. Otherwise, the worker is an employee, and you are responsible for withholding taxes.
Behavioral control means that if you can tell your agent when, where and how to work, then he or she cannot be an independent contractor. In your case, if you have the right to require the agent to work at your office on certain days and hours, the agent probably cannot be an IC.
Financial control means that, unless the worker foots his or her own business expenses or is in a position to incur a loss, he or she cannot be an IC. Here, if you reimburse the agent for his or her at-home expenses, your relationship will probably fail this test.
The facts of the relationship means that the IRS needs to see that there is a written IC contract, among other facts. Your at-home agent working without a formal contract will probably not be classified an IC by the IRS.
Notice that I use the word "probably" in describing how the IRS would view each aspect of the relationship.
According to the IRS, "no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another."
At the state level, the majority of states use the so-called "ABC test," which requires, among other things, that the worker work entirely off-premises if he or she is in the same business that you are in. Thus, a travel agent probably could not be an IC if he or she works even part time at your travel agency.
To make it more likely that your relationship can pass muster with the IRS and state authorities, you can refrain from requiring the agent to work at your office, charge a monthly fee so that the agent will sustain a loss if he or she makes no sales and have a written contract that is consistent with the criteria set forth above.
However, there is always a risk that any agency-IC relationship will be challenged by a taxing authority, especially by governments anxious for more revenue.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email himat [email protected].