Employees versus Independent Contractors

Many families get this issue confused, but it’s serious business for the IRS. In Cardiovascular Center, LLC v. Commissioner of Internal Revenue (U.S. Tax Court 5-18-2023), Dr. Frank Kresock operated a medical practice in Arizona. He paid four workers, plus the person he lived with, as independent contractor’s, giving them biweekly cashier’s checks. However, all “workers were subject to Dr. Kresock’s supervision and reported to him. The workers were expected to follow the office procedures that were set by and communicated to them by Dr. Kresock and Ms. Smith. None of the workers was able to realize a profit or loss because of their services.”

In determining a worker’s legal status, the Court applied common law concepts. it considered “various factors in determining whether a worker is a common law employee or an independent contractor including: (1) the degree of control exercised by the principal over the worker; (2) which party invests in the work facilities used by the worker; (3) the worker’s opportunity for profit or loss; (4) whether the principal can discharge the worker; (5) whether the work is part of the principal’s regular business; (6) the permanency of the relationship; and (7) the relationship the parties believed they were creating. Id. at 270. No single factor is dispositive, and all facts and circumstances must be considered. Id.”

Specifically, with regard to control the Court found Kresock was responsible for creating and implementing procedures to be followed and directed their daily work. Kresock controlled the location of the work, the work performed, the products used to complete the work, the amount of workers and the amount paid. There was no indication the workers used their own tools or supplies, so there was no evidence the workers invested in the work facilities. The work performed was part of the regular front-office and back-office operations and that work was performed at Kresock’s direction. At least one worker was with Kresock from 2011 through 2015 so it was by no means transitory. The end result or Dr. Kresock was the Tax Court held he was liable for unpaid employment taxes and penalties.

So, in the context of caregiving, how is it normally done? You (the family) require the caregiver show up where the care needs to be done. You typically direct what needs to be done and supply the equipment to get it done. The caregivers are under your control. They are paid a wage, not a share of profits. You can discharge them at any time. I hope you see where this is going. In most cases, you have so much control over caregiver that the IRS would consider them your employee.

A federal court in Texas actually considered this question. In Mason v. Helping Our Seniors, LLC (W.D. Tx 10-13-2022), Mason brought an action alleging retaliatory discharge under the Civil Rights Act. One important issue was whether Mason was an employee or an independent contractor. Holding that Mason was an employee, the court said: “In determining whether an individual is an “employee” under Title VII, the Fifth Circuit applies the hybrid “economic realities/common law control test” first recognized in Spirides v. Reinhardt, 613 F.2d 826, 831 (D.C. Cir. 1979). See Diggs v. Harris Hosp.-Methodist, Inc., 847 F.2d 270, 271–72 (5th Cir. 1988) (summarizing the test). This test considers “the economic realities of the work relationship, and the extent to which the one for whom the work is being done has the right to control the details and means by which the work is to be performed, with emphasis on this latter control factor.” Id. at 272; see also Deal v. State Farm County Mut. Ins. Co. of Tex., 5 F.3d 117, 119 (5th Cir. 1993) (“The right to control an employee’s conduct is the most important component of the test.”).” (Emphasis added). The Court held that Mason’s “employer” was liable for unpaid wages and other damages.

For families, it is important to remember that you’re not simply talking about liability for unpaid employment taxes. If you are a statutory employer, then you may also be liable for lost wages and medical expenses under the worker’s compensation statute if your employee is hurt on the job. See O.C.G.A. § 34-9-8. Bottom line is, don’t assume that your hand-shake deal won’t have legal consequences if the IRS knocks on your door or if your caregiver is injured. Recall the embarrassment of Nannygate when two different appointees for U.S. Attorney General had their nominations derailed for failing to treat household workers as employees.