As we head into Labor Day weekend, it’s a good time to stop and focus on worker misclassification.
We’ve covered worker misclassification in the past, but it is a topic that is worth covering again as misclassifying a worker can lead to serious penalties.
In Virginia, workers are either employees or independent contractors. Starting in 2020, the law presumes everyone “who performs services” for another person for compensation is an employee, unless you can demonstrate that the person qualifies as an independent contractor under the Internal Revenue Service (IRS) guidelines.
The IRS guidelines say that licensed real estate agents are independent contractors if two conditions are met:
- Substantially all payments for their services as real estate agents are directly related to sales or output, rather than to the number of hours worked, AND
- Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes.
This means that all agents at your firm who are independent contractors must have signed an independent contractor agreement, like Form 1700, that explicitly says they will not be treated as an employee for federal tax purposes, and they must be paid based on volume, rather than hours.
With agents, it is fairly easy to determine whether they are independent contractors or employees. It’s much harder to make that determination when talking about other workers at your firm or on a team or working for an agent at your firm. The IRS relies on the common law (law derived from court cases instead of statutes) to create the factors used in determining whether someone is an employee or independent contractor. The common law rules fall into three categories:
- Behavioral: Does the company/firm/team/agent control or have the right to control what the worker does and how the worker does their job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of relationship: Are there written contracts or employee type benefits (i.e., insurance, vacation pay, retirement plan, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
The IRS has made it clear that “there is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor and no one factor stands alone in making this determination.” In general, the key is to look at the entire relationship and consider the extent of the right to direct and control the worker. The more direction and control over the worker, the more likely they are an employee.
If you are unsure whether to classify someone as an employee or independent contractor, you should default to classifying them as an employee until you can determine otherwise. The IRS does offer a service where you can submit a form, Form SS-8, and they will make a determination of whether the worker is an employee or independent contractor.
If you have any questions on this topic, we encourage you to reach out to the Virginia REALTORS® Legal Hotline.