Mark Pestronk
Mark Pestronk

Q: Is the federal government less likely to attack independent contractor (IC) relationships these days than it was under the Obama administration? I remember that the Department of Labor had proposed a new standard that would have really hurt the travel agency business if it had been adopted. Has that standard been withdrawn or repealed? Has any new standard been articulated? What about the IRS? In short, do you think that my host-IC relationships have a better chance of surviving an audit than they did a few years ago?

A: I have no doubt that the federal government is now less anti-IC than it was under the Obama administration. Three interesting developments support my view.

First, the Labor Department has withdrawn its 2016 guidance that would have reclassified IC relationships merely because the IC was economically dependent on the host. Under that standard, if the IC depended on the host for referrals, training or essential services, the relationship would have failed the test.

Instead, Labor reverted to the old "economic realities" guidance, which is that you have to weigh six different factors but that you give the most weight to the extent of control by the host over the IC's work.

Second, in April, Labor issued an opinion holding that a referral company's service providers were independent contractors under the traditional six-factor test. Among other reasons, the department noted that the service providers were "working for consumers," not for the referral company; that the referral company did not "impose particular duties, shift or quotas"; and that the company gave workers the "flexibility to choose if, when, where, how and for whom they will work."

The quoted phrases would fairly describe most host-IC relationships today, so it should be less difficult for a host agency to survive a Labor audit.

Third, although the IRS has not issued any new regulations or rulings on IC versus employee issues, I found that the IRS has recently apparently simplified its guidance for small businesses in ways that may make compliance a bit easier.

For the past few decades, the IRS has used a three-factor test called "behavioral control, financial control and facts of the relationship test." The IRS examines whether the company exercises behavioral control over how and when the work gets done, whether the financial relationship is like that of an employer and employee and whether the other aspects of the relationship are consistent with independent contractor status.

However, the most recent IRS guidance for small businesses, which can be found here, seems to loosen things up a bit. Now there are only two factors instead of three: the control factor and the relationship factor.

Significantly, the new guidance no longer mentions mandatory training as a factor indicating behavioral control; nor does it any longer state that "instructions about what tools or equipment must be used" are prohibited.

If your host-IC relationship has been properly structured, it certainly looks like you stand a better chance of surviving a federal agency audit than you did three years ago.

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