Overview of DOL Audits for Independent Contractors
If you are being audited by DOL, it is most likely because you are a business based out of Georgia with at least a handful of independent contractors. The DOL will look at whether these independent contractors are truly contractors or employees.
The Core Problem: Definition of Employee vs. Contractor
The problem starts with the DOL’s broad definition of employee vs. contractor.
Once upon a time, the IRS would audit companies for 941 payroll tax and gave a definition of an independent contractor that was actually somewhat logical.
- As long as the person did not have a permanent office space at the company where they were contracting,
- Did not have a continuous relationship with general duties and a standard work week,
The individual would be deemed a contractor.
That is not the case with the DOL.
The DOL’s Definition of Employment
Service performed by an individual for an employee unit, whether or not such individual employs others in connection with the performance of such services, shall be deemed to be employment unless and until it is proven in any proceeding where such issue is involved that —
Three Key Conditions to Prove
- Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact;
- Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
- Such individual is engaged in an independently established trade, occupation, profession, or business.
Frequently Asked Questions
What triggers a DOL audit for independent contractors in Georgia?
A DOL audit is often triggered when a business based in Georgia engages multiple independent contractors. The audit typically investigates whether these workers are properly classified under labor laws.
How does the DOL define an employee vs. an independent contractor?
The DOL uses a broad definition of “employee.” Even if a worker considers themselves a contractor, they may be classified as an employee unless strict criteria are met, focusing on control, location, and independence.
What are the three conditions to prove someone is an independent contractor?
To classify a worker as an independent contractor, the business must show that the individual:
- Is free from control in contract and practice;
- Performs services outside the company’s usual business or outside its locations;
- Operates an independently established business or trade.
How does the DOL’s approach differ from the IRS?
The IRS historically offered a more lenient contractor classification. For instance, workers without a permanent company office and who didn’t follow a standard schedule were generally considered contractors. The DOL’s standard is stricter.
What happens if a worker is misclassified?
If a contractor is misclassified as an employee, the business could face penalties, including back wages, taxes, and fines. DOL audits are designed to uncover and correct such misclassifications.