Abraham Lincoln reportedly asked, ‘‘If you call a dog’s tail a leg, how many legs does a dog have?’’ His answer was, ‘‘Four. Calling a dog’s tail a leg does not make it a leg.’’ Similarly, when businesses classify workers, they must consider a variety of factors. Simply labeling a worker as an independent contractor is insufficient and may expose the business to potential worker classification audits by both state and federal agencies. In this article, using the Ninth Circuit’s FedEx Ground case as a guide, Bruce Ely and Sims Rhyne discuss salient issues for businesses and their tax advisers when classifying workers.

Worker classification audits expose businesses to far more than just liability for uncollected federal employment taxes. Businesses can be exposed to liability for unpaid state payroll taxes, state worker’s compensation and unemployment charges and benefits, penalties and fines for federal Wage and Hour law violations, and unfunded health insurance, fringe benefit and retirement plan obligations. The recent decision of the Ninth Circuit Court of Appeals in the class action suit, Alexander et al. v. FedEx Ground Package System, Inc., Nos. 12-17458, 12-17509 (9th Cir. Aug. 27, 2014), as well as the recent increase in worker classification audits by both federal and state agencies, highlights the importance of properly classifying workers and the potential exposure a business may have if it has misclassified workers—innocently or not.

Originally Published in Bloomberg BNA’s Tax Management Weekly State Tax Report - October 24, 2014.