Does This Look Like an Employee to You?

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The IRS uses a notorious set of 20 common-law guidelines to determine a worker's status. For instance, the more training a worker receives, the more he looks like an employee. If a worker's services are integral to business operations, she looks like an employee. Workers who furnish their own tools look more like independent contractors.

There is some brutal justice in the IRS's guidelines. They tell owners and workers that they can't have the best of both worlds. But the guidelines are vague and arbitrary. Not all of them apply in every case, and they aren't weighted, so you might pass all but one test and still fail.

The recent crackdown isn't the first; the IRS aggressively pursued misclassification of workers in the mid-1970s. But companies complained so bitterly that Congress passed a safe-harbor provision, Section 530, allowing continued and unending use of independent contractors without penalty if businesses could qualify on three counts: first, they had to have filed their 1099 forms faithfully; second, they had to prove "consistent use" (in other words, all workers had to be contractors -- there could be no mix of employees and contractors); and third, they had to prove "reasonable basis" (that is, that they were relying on industry practice or a long-standing precedent). Intended as a stopgap, the statute was extended indefinitely.

The IRS laid off for a while. Meanwhile, use of contractors rose. In 1985 nearly 12 million taxpayers filed returns as sole proprietors, a group that includes independent contractors; by 1990 the number had grown by 3 million.

Of course, much of the increase was legitimate -- part of a watershed in the way America works. But some of it wasn't. Faced with a tough business climate, some companies decided that reclassifying employees as contractors was a cheap way to get the same work done. Workers were in no position to argue.

In 1985 the feds test-audited independent contractors in seven districts and found widespread misclassification and unpaid taxes -- lots. Since then, the IRS has been sowing mines all over Section 530's safe harbor. Assisted by computerized processing of tax returns and information shared with state agencies, the IRS has stepped up its audits of companies that use independent contractors. Congress originally instructed the IRS to interpret Section 530 liberally. Businesses say that lately it's easier for a camel to pass through the eye of a needle than for them to gain safe harbor.

The IRS makes a convenient bad guy. but the agency says it's just doing its job, trying to recover some of the $2 billion a year in lost revenues it attributes to misclassification -- money that should have been paid in income taxes, Medicare, Social Security, and state and federal unemployment insurance, debt that the rest of us have to cover. "There's a side to it that company owners ignore," says Tony Warcholak, former director of employment-tax administration for the IRS. "Contractors aren't covered by unemployment insurance, and they become an additional cost to the state if they end up on welfare."

States hard hit by the recession have also stepped up their efforts to reclassify contractors, to recoup some of the money paid out in unemployment benefits. Illinois is one of the toughest, in a class with California, Georgia, Michigan, New York, and Texas. Most states, including Illinois, use the "ABC" test to differentiate between contractors and employees. Even vaguer than Section 530, it comprises three broad criteria, all of which a company must meet: (a) Does the company exercise control over the worker? (b) Does the worker perform services at the company's place of business or in its course of business? (c) Does the individual work in an independently established trade? It's an easy test to fail, especially when "control" can be as simple as dispatching a driver, and "place of business" is extended to include anyplace a driver picks up a package.

Kris Guse makes about $400 a week driving for Quicksilver Messenger Service -- enough to cover his dirt-cheap rent and slacker expenses. One week, when the Grateful Dead was in town, he made just half that. He gets no salary, no hourly wage -- just a 55% commission on every delivery he makes, whether it's a $5.40 deferred delivery to Meigs Field three miles away or a $65.90 emergency delivery 68 miles to Hebron. Drivers who really push, he says, can make $1,000 a week.

Before this job, Guse worked in a furniture shop. "We made beautiful stuff, and I loved the work, but the boss and I disagreed," he says. "I told him, 'If our results are the same, what does it matter whether I do it your way or mine?"

Guse rolls in at 9:30 a.m., hours after hungrier drivers have left for their first deliveries. He gets a package going out to Hoffman Estates, an office park in Chicago's northwest suburbs. When he gets there he parks illegally in front of a wheelchair ramp, trots into the office to deliver an envelope, returns, and radios the dispatcher at Quicksilver's downtown office. A good dispatcher is the key to a courier service's success, keeping both customers and drivers happy. Hraha knits together a series of short hauls for Guse that bring him back downtown in stages, making money all the way. "With this job, I take whatever route I want. They don't argue with me." Guse sets his own hours, too. In the summer he keeps a fishing rod in the backseat, and, he says, on particularly slow days -- or particularly nice days -- "I'll tell them, 'Let me go, I've got other things to do."

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