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Education

ISOs will naturally prefer that their agents be independent
contractors, not employees, because that may cost less and
also simplify tax and compensation matters. An agent may
also prefer independent contractor status because they
Legal ease: may wish to deduct business expenses from their revenue
that would not be deductible if they were an employee.
The key takeaway is that the relationship might not be
what you think it is. Despite your best efforts to create one
type of relationship, you may have actually created the
other.

How do I know which it is?
Are agents employees To determine with certainty whether an agent is an
employee or independent contractor, you must consult a
local lawyer in the relevant state. However, some well-
or independent established criteria will point in one direction or another.
The IRS maintains a handy web page on this, https://
contractors? bit.ly/2V5oWwH, which lists the three most important
indicators of an employment relationship:

By Adam Atlas 1. Behavioral: Does the company control or have the
right to control what the worker does and how the
Attorney at Law worker does his or her job?

SOs grow by engaging agents to sell for them. Some 2. Financial: Are the business aspects of the worker’s
agents are employees; some are not. The purpose of job controlled by the payer? These include things like
this article is to dig into this legal issue, its relevance how a worker is paid, whether expenses are reimbursed,
I and approaches to help manage the related risk. who provides tools/supplies, etc.
Why does it matter whether agents
are employees or not? 3. Type of relationship: Are there written contracts or
employee-type benefits such as pension plan, insurance,
An employee-employer relationship is fundamentally vacation pay, etc.? Will the relationship continue, and is
different from that of an independent contractor doing work the work performed a key aspect of the business?
for a business. State and federal laws impose obligations
on employers, such as providing tools and equipment As the criteria above indicate, control is a key factor. If
and payroll deductions for taxes, 401(k) contributions, the ISO sets appointments and provides a desk, coffee
wage garnishments or child support payments. State and a computer, the agent appears to be much like an
law also reads certain rights into the employer-employee employee. On the other hand, if the agent sets their own
relationship, notably around termination, minimum appointments, buys their own computer, and comes to the
wage and other key topics. ISO insurance policies may office for training and to hand in applications, this could
also provide for different treatment of employees and be evidence of an independent contractor relationship.
independent contractors. Can I rely on my contract for this?

Both ISO and agent should be clear as to the precise Some ISOs endeavor to develop a form of independent-
nature of their relationship. Failure to do so could result contractor agreement and believe (incorrectly) that this
in disappointment for both parties. For example, an ISO will fully protect them against their agents being deemed
that thought all its agents were independent contractors employees. But the status of an agent as an employee or
when, as matter of law, they were employees, could end up independent contractor depends on both the contract and
having to pay penalties to the state. the facts and circumstances of the actual relationship.
And this issue is an unusual legal subject where behavior
What kind of question is this anyway? trumps express language in a contract.
Whether someone is an independent contractor or an
employee is a legal question. The answer to that question To be clear, a contract could describe a perfect independent-
might not be obvious from one source only, such as contractor situation, including language to the effect
the contract. This is what makes the contractor versus that the agent is independent and responsible for their
employee issue vexing to some people, because the own expenses etc. But if the behavior does not match
nature of the relationship can sometimes be interpreted the wording of the contract, then the IRS will rely on the
differently, depending on who is asking and why. behavior to determine the status of the agent.

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