Temporary or permanent? IRS may be watching

Electrical Apparatus, Feb 2001

Companies can get into serious trouble with the Internal Revenue Service by claiming certain employees as "temps" when, in reality, they are more like permanent employees. By classifying an employee as temporary, businesses can avoid withholding taxes, worker compensation, unemployment insurance, and overtime.

Such an interpretation by Microsoft of its 10,000 "temporary" employees may end up costing the software giant $97 million, the proposed settlement in a class-action suit. "Permatemps" is the way the magazine Infoworld describes the long-term employees that have claimed they were misclassified by Microsoft.

IRS regulations help define the differences between permanent and temporary employees. A Palo Alto, Calif., lawyer, Raymond Hixson, says misclassifying an employee can be an expensive mistake. The critical factor, he says, is the degree of control the company has over how the employee performs the work. "Control is indicative of employee status," Hixson says.

Hixson further suggests that employers not provide temporary employees with tools, define how their work is to be done (versus what is to be accomplished), nor provide them with office space or training. Companies should also not give temporary employees and contractors business cards or set hours of employment.