Are Salespeople Independent Reps or Employees?

by Jack Evans (reprinted courtesy of Repertoire Magazine)

Only the IRS knows for sure. And almost everyday independent sales reps and
manufacturers tread a thin line that further blurs these distinctions. Even
the largest manufacturers and rep firms are liable of not knowing how the IRS
classifies independent contractors in relation to employees.

Consider the following "real-life" examples and see if you can determine
whether the salespeople are independent reps or employees according to the
IRS:

• A manufacturer requests their reps to submit call reports.
• Independent reps are required to be at a manufacturer's sales meetings.
• A manufacturer uses independent reps in rural areas and direct salespeople
  in the cities, all of whom are required to do the same work the same way.
• An independent rep uses sub-reps in his own city whom report to his
  corporate office on a regular basis.
• An independent rep is paid for specified sales calls and expenses
  regardless any commissions earned, then is fired and files for unemployment.
• An independent rep is paid a minimum "draw" (retainer) by a manufacturer
  for the first six months of pioneering a new line.
• A manufacturer pays an independent rep a set fee each time she trains other
  reps and customers.

Want to Play 20 Questions?

According to the IRS 20 Common Law Factors, the independent reps or sub-reps
in the above examples are considered to be employees. BUT there have never
been any clear universal guidelines for manufacturers and independent reps to
follow. The IRS used to apply their 20-question test to see how many "yes's"
they could find to decide if:

1. Independent contractors are in fact being treated as employees by a
   manufacturer; and
2. Sub-reps are being treated as employees by independent contractors.

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?

Who's Withholding What?

If the IRS finds independent reps to be employees, the results can be very
expensive. Aside from paying all back Social Security, FICA, FUTA, Medicare,
federal and state withholding income taxes, state disability and workman's
compensation insurance costs, there are other benefits 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 that 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 versus independent contractor status for each factor (see
side bar). Both organizations recommend that their members read through 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 you start telling your
independent contractors how they are to accomplish their work, you have
crossed into that IRS "gray" area of employee status and are open to
questioning.

Independent reps with sub-reps face yet another IRS challenge called the
"Daskal Distance Doctrine." Sub-reps are more defendable as independent
contractors the further they live and work from a rep's main office.
According to MRERF's counsel, there is a direct correlation between the
distance from the rep to the sub-rep and the exercise of "direction and
control." A 400-mile distance appears to be the safe cut-off that
substantiates 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 this home office, the easier it is for them to document direction and
control.

For further information, contact MRERF at 800 346-7373 or HIRA at 800
777-HIRA.

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