Partner Steven Benjamin today received notice that the Internal Revenue Service sided with the firm’s client, an agency that administers millions of dollars of California’s CalWorks childcare subsidy program, by finding that an in-home childcare provider was an independent contractor and not an employee of the firm’s client. Although IRS determinations are unique to the facts of each case, as a practical matter, had the IRS ruled the other way, e.g., that there was an employment relationship, that determination would have presented a serious problem for the agency’s administration of the CalWorks program vis-a-vis all in-home childcare providers.

Facts and Allegations

The agency is a nonprofit public benefit corporation in the business of administering childcare subsidy programs. The worker provided her services to the agency’s client in 2009 and 2010 as a childcare provider and received the Forms 1099-MISC for these services.

The worker filed a Form SS-8 with the Internal Revenue Service, contending that she was an employee of agency in 2010 and not an independent contractor. Benjamin Law Offices, working in close collaboration with the client agency’s in-house counsel, prepared an extremely thorough response, explaining the structure of the state and federal welfare reform laws, the necessity of treating childcare providers as independent contractors or not employees of the agencies doling out the childcare subsidy payments, and factually why the worker was an independent contractor.

The worker entered into an agreement with the agency in 2009 to become a childcare provider. The worker was selected as a child care provider by the agency’s clients. The worker signed an exempt provider child care agreement which stated the conditions and expectations required of her. According to the agreement, “[t]he provider, in performance of the agreement, is acting as an independent contractor in an independent capacity and not as officer, agent or employee of the agency, the Program of the State of California.”

The agency’s clients and the worker determined the methods by which the assignments were performed. If any problems or complaints arose as a result of the worker’s services, the worker was ultimately responsible for problem resolution. The worker did not have a set schedule; she provided her services as needed. The worker provided her services personally in her own home. If additional help was required, the worker hired and compensated the helpers.

The worker did not lease any equipment in the performance of her services for the agency’s clients. The worker was not reimbursed by the agency or the agency’s clients for any business expenses incurred in performance of her services. The worker received a child care subsidy payment from the agency on behalf of the agency’s clients and the worker stated this was received monthly. The agency’s clients paid the worker for the services she provided. The agency did not carry worker’s compensation insurance on the worker. The agency stated that the worker assumed all the financial risk in the relationship such as the cost of materials, food, drink, rent or allocation of square footage of her home devoted to her childcare.

The facts showed that the worker was not subject to certain restraints and conditions that were indicative of the agency’s control over the worker. Accordingly, the worker was an independent contractor of the agency for purposes of federal employment taxes.

This SS-8 determination proceeding highlights the importance of correctly classifying workers as employees or independent contractors. Had the IRS ruled the worker an employee of the agency, the agency would have been responsible for remitting federal payroll taxes for the worker. Because the agency treated many other in-home childcare providers similarly, the potential ramifications for the agency were severe.