Alabama has enacted legislation (House Bill 408) that requires employers to use specified guidelines for determining whether a worker is an employee or independent contractor under certain laws. House Bill 408 takes effect on July 1, 2021.
Background:
Title 25 of the Code of Alabama provides unemployment benefits, workers' compensation, and certain employment protections for employees, such as nondiscrimination and workplace safety. Title 40 of the Code of Alabama governs tax liability for employers and employees.
When a worker qualifies as an independent contractor (as opposed to an employee), the employer may be relieved of certain obligations for that individual. For instance, a bona fide independent contractor may not be entitled to unemployment benefits. However, only a small fraction of workers qualifies for independent contractor status. The presumption is that a worker is an employee, unless they meet certain criteria established by federal and state tests and different tests are used to determine coverage under various laws. For example, the Internal Revenue Service (IRS) uses a Common Law Test to determine whether a worker is an employee for federal tax purposes.
House Bill 408:
House Bill 408 establishes that employers must use the IRS's Common Law Test to determine whether a worker is an independent contractor or employee for the purposes of the benefits and protections under Title 25 (see exception below). Employers must also use the IRS's Common Law Test when determining tax liability under Title 40.
The IRS Common Law test looks at three factors to determine the degree of control the business has over the worker:
- Behavioral: Examines whether the company has the authority to direct and control the work of the service provider and looks at whether the worker receives training and instruction.
- Financial: Looks at factors such as whether the worker realizes a profit or loss, makes investments in tools and facilities, and has unreimbursed expenses.
- Type of relationship: Looks at whether there is a written contract between the parties, the permanency of the relationship, and whether the worker is entitled to employee-type benefits.
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor, and no one factor stands alone in making this determination.
When making the determination, the safe harbor under Section 530 of the Revenue Act of 1978 must also be applied. Section 530 provides employers with relief from employment tax obligations if certain statutory requirements are met.
Exception:
House Bill 408 doesn't apply to any determination of whether a worker is considered an employee or independent contractor for purposes of the state's workers' compensation laws.
Compliance Recommendations:
Before classifying any worker as an independent contractor, employers should apply all applicable tests. If any workers are currently classified as independent contractors, review those classifications in light of House Bill 408. Please contact your dedicated service professional with any questions.