Advice and Resolution Corner - Independent Contractor Audits

Document created by 1050210 on Nov 14, 2014
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Published Date: 09/15/2014


George; Ports

By George Ports


[Don’t miss the Advice and Resolution Corner Plus members-only webcast scheduled for this Wednesday, September 17, 2014 at 8:30 am. Register now at]




Does CAI recommend that organizations periodically conduct audits or have them conducted to ensure that Independent Contractors providing services to the organization are properly classified as such?




Yes we do. Over time it is possible that relationships that initially passed the “Independent Contractor Smell Test” have morphed into an employer/employee relationship. CAI has published several articles over the years regarding Independent Contractors, spelling out the criteria used by regulatory agencies to determine if the work relationship is that of an Independent Contractor and the consequences of misclassification.


Some of the major criteria used to evaluate the work relationship are as follows:


  • Extent to which services are integral part of the principal’s business
  • Permanency of relationship
  • Contractor’s investment in facilities & equipment
  • Contractor’s opportunities for profit or loss
  • Open market competition
  • The nature and degree of control by the principal


The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.


The major consequences of “misclassification,” treating employees as Independent Contractors are:


  • FLSA minimum wage, overtime and recordkeeping violations
  • Taxes, including IRS, State, UI, FICA, etc.
  • Workers’ Compensation Liability


For more information on the criteria used by the Internal Revenue Service (IRS) and the US Department of Labor’s Wage and Hour Division to determine the nature of work relationships, go to and


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