Are Salespeople Independent Reps or Employees?
Edition: September 1999 - Vol 7 Number 09
Are salespeople independent reps or employees? Only the IRS knows for sure. And almost every day independent sales reps and manufacturers tread a thin line that further blurs these distinctions. Even the largest manufacturers and rep firms may not know how the IRS classifies independent contractors in relation to employees.
Can you determine whether the salespeople are independent reps or employees according to the IRS? Consider the following ‘real-life’ examples:
According to the IRS 20 Common Law Factors, the independent reps or sub-reps in these above examples are considered to be employees. To help clarify the distinction between employees and independent contractors, the IRS produced a training manual and grid comparing the status of both. (See below.) Manufacturers and reps should take the time to carefully read -- and save -- this grid.
'Control and Direct'
In the words of the IRS, ‘The general rule is that an individual is an independent contractor if you, the employer, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.’
The issue here is how an independent rep conducts their business, according to the Manufacturers' Representatives Education Research Foundation (MRERF). Independent sales reps are independent contractors who are not under any one manufacturer's ‘direction and control,’ because they work for several manufacturers and usually have their own offices, own business licenses, own employees, own equipment and own investment at risk.
MRERF presents the example of an independent contractor who is a lawyer or CPA and offers their services to the general public. You hire them for a specific task but you don't tell them how to accomplish that task. You depend upon their independent, professional judgement and expertise to perform these services. Your goal is to get the results you want. If they don't perform, you don't pay. Otherwise, what are you paying for?
Independent reps with sub-reps face yet another IRS challenge called the ‘Daskal Distance Doctrine.’ Simply put, sub-reps are more defendable as independent contractors the farther they live and work from a rep's main office. According to MRERF's counsel, there is a direct correlation between the distance between rep and sub-rep, and the exercise of ‘direction and control.’ A 400-mile distance appears to be the safe cutoff that substantiates that sub-reps work from home or branch offices instead of the ‘home office.’ According to IRS decisions, the closer the sub-rep lives and works to the home office, the easier it is for them to document direction and control.
Who's Withholding What?
If the IRS finds independent reps to be employees, the results can be very expensive for manufacturers and reps who contract with sub-reps. In addition to back Social Security, FICA, FUTA, Medicare, federal and state withholding income taxes, state disability and workman's compensation insurance costs, other benefits are due employees, such as sick days, holiday pay, vacations, retirement plans, plus all interest and penalties, legal and accounting fees and unemployment. In the long run, this can be much more expensive than simply hiring reps and sub-reps as employees in the first place.
Both MRERF and the Health Industry Representatives Association (HIRA) direct their members to the IRS restatement of these ‘20 Factors’ that directly compare employee vs. independent contractor status. Both organizations recommend that their members read this list before any announced IRS audits, as these are the guidelines that the auditors will be following. And once you are audited, you pay heavily to the IRS, your attorneys or both -- definitely a ‘lose/lose’ proposition!
When studying this list of factors, keep in mind the IRS's concern with controlling or directing the means and methods of accomplishing this work. Control is crucial here, whether you are a manufacturer using independent reps or an independent rep using sub-reps. Once the manufacturer or rep with sub-reps starts telling its independent contractors how they are to accomplish their work, it has crossed into that IRS ‘gray’ area of employee status and are open to questioning.
For further information, contact MRERF at 800 346-7373 or HIRA at 800 777-HIRA.
About the Author: Jack Evans is an editor of ‘The Communicator,’ the newsletter of the Health Industry Representatives Association, Denver, CO (www.hira.org), and president of Global Media Marketing. Malibu, CA www.retailhhc.com