The Tax Court has recently concluded that workers hired by a construction company to work on various residential projects were employees. Despite the fact that the workers were hired on a project-by-project basis, the overall facts of the case, including that the workers were controlled by the company’s sole proprietor and that they were an integral part of the business, indicated an employer-employee relationship. Accordingly, the company was liable for employment taxes for the year in dispute.
The case involved Mieczyslaw Kurek who was the sole proprietor of KMA Construction, a home improvement company that engaged in installing tile, sheetrock, doors, and windows, as well as painting and carpentry. Each of these factors were important during the court decision:
- Kurek had control over the workers. The Court characterized the right of the principal to exercise control over the agent, regardless of whether the principal in fact does so, as the “crucial test” in analyzing for an employer-employee relationship. In this case, Kurek set the deadlines, monitored the work done, visited the worksites, instructed the workers on the work they were to do and had the right to approve its quality, paid them weekly, and was ultimately responsible for the success of the project. Overall, these facts heavily favored employee status.
- Kurek supplied heavy tools and materials. The workers used their own small tools to perform most of their work, but Kurek supplied all heavy tools and purchased all materials used by the workers. This factor slightly favored employee status.
- Only Kurek had opportunity for profit and risk of loss. The workers were paid a negotiated flat fee, and were thus insulated from suffering a loss or realizing a profit, and were also prevented from increasing their earnings through their efforts. This factor favored employee status.
- Workers could be discharged. Although the workers were hired on a project-to-project basis, Kurek could replace any workers that failed to meet a deadline or perform to Kurek’s satisfaction. This favored employee status.
- Workers were integral to the business. Without the workers, Kurek wouldn’t have been able to finish 20-30 projects, while at the same time finding new projects and working with the homeowners. This favored employee status.
- Work relationship was largely transitory. The workers were hired for one project at a time, they were free to work on other projects or with other groups, and only seven of the workers actually worked for Kurek during all four quarters of 2005. This slightly favored independent contractor status.
- Parties believed they created independent contractor relationship. Kurek and one of the workers credibly testified that they believed they created an independent contractor relationship, which favored independent contractor status.
Thus, overall, the Tax Court agreed with IRS that the workers listed in the notice of determination were employees.
Note: The IRS has in place a Voluntary Classification Settlement Program (VCSP) for employees that have been misclassified as independent contractors (or as other nonemployees). This was talked about in this blog post.