Are my tutors Employees or Independent Contractors?

Deciding whether to classify your tutors as W-2 Employees or as 1099 Independent Contractors is an important decision that needs to be carefully considered with the help of a qualified employment attorney.  Improperly classifying tutors can be a very expensive mistake and can cost you tens of thousands in legal fees and hundreds of thousands in back payments. Ever since the Great Recession, reports from the front lines indicate an uptick in government agency audits centered on employee misclassification issues. Our tutoring company was audited back in 2007 by the Department of Economic Security, and we decided at that time to convert to a W-2 model when our attorney advised us that our likelihood of success was minimal.

What factors should I evaluate before making my decision?

Determining whether or not your agency should hire 1099s versus W-2s revolves primarily around the issue of employer control and tutor independence. The greater the amount of control that a tutoring company maintains over the tutoring faculty, the greater the chances that the company will be required to classify its tutors as W-2 Employees. Here are some key questions that you might consider in evaluating your level of control and of tutor independence:

1. Does your tutoring company generally tell its tutors where and when to provide services?
2. Do your tutors generally work set hours with each client?
3. Does your tutoring company provide a training or orientation?
4. Does your tutoring company provide curricula?
5. Is the tutor required to follow a set sequence or routine while performing the tutoring? (For example, does the company furnish the tutor with a student learning plan or with some form of curriculum map or pacing guide?)
6. Is the tutoring performed at the tutoring company’s premises?
7. Does the tutor need to personally perform the contracted services or can other tutors take on the same contract interchangeably?
8. Must the tutor provide your tutoring company with progress reports regarding the work?
9. Does the tutor only provide tutoring services for your company?

There are some other gray area questions regarding whether your tutors realize a profit or loss from the work. The IRS has a helpful page that can provide some insight into this complex issue. You may also find lists on the web of the IRS 20 Point Checklist. In our experience, there is no substitute for finding a skilled employment attorney in your state who can perform a compliance audit on your company. A small investment up front can save you tens of thousands down the road. There is no magic number of factors that makes the worker an employee or an independent contractor, and no single factor stands alone in guaranteeing this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

What events can trip a classification audit by a government agency?

While this list is by no means comprehensive, here are some common ways in which tutoring and test prep companies can get flagged for an audit:

1. A 1099 Independent Contractor will file for unemployment with your state’s Department of Economic Security, list your tutoring agency as a past employer, and the agency will send an unemployment claim to your company. The tutoring company will either file a late response which will trip an audit, or the government agency will arbitrarily flag your company for review. In our experience this has been the most common way in which we’ve seen audits initiated since 2007.
2. Regular IRS audits of tutoring agencies include guidance to check compliance with IRS Independent Contractor Classification rules.
3. A tutoring agency will submit a stack of 1099s and a number of these independent contractors fail to pay their taxes, prompting an IRS audit. Under IRS rules, the contracting company is responsible for payment of unpaid taxes in the event of contractor non-payment.
4. A disgruntled 1099 tutor will speak with a labor lawyer who will review your tutoring company’s business practices and file a complaint with the IRS or the Department of Labor. In particularly egregious situations, we have even seen disgruntled tutors retain the services of a plaintiff attorney who then files either a federal or state class action lawsuit on behalf of all of the tutoring company’s grieved employees from the last three or even four years depending upon the state. As many business insurance policies exclude wage and hour complaints, businesses are left to fend for themselves in what can be an extremely costly legal battle.

What if I decide to switch to a W-2 Employee business model? What changes can I expect for my company?

A safe rule of thumb is that running a tutoring company with a W-2 tutoring staff can add a significant amount to your company’s cost structure as well as a need for some sophisticated business processes. Here are some changes that you may experience:

1. Tutoring and test prep companies that employ W-2 Employees need to pay an additional 7.65% to cover the employer portion of the employee’s Social Security (6.2%) and FICO (1.45%) Under a 1099 model, the Independent Contractor pays this 6.25% at the end of the tax year.
2. You will incur the added administrative expense of withholding W-2 tutor taxes and making quarterly payments to state and federal tax agencies. Many companies outsource this task to payroll companies and some even hire PEO firms to manage this process.
3. As a W-2 employer, you will be required to adhere to State and Federal employment laws, which include reimbursing certain expenses, paying tutors every two weeks, paying final checks within a certain number of days in the event of a tutor termination, adhering to Fair Labor Standards Act regulations, and adhering to other federal, state, and local laws that govern employer employee relationships.
4. You will likely need to invest in more insurance for your company as W-2 employees are entitled to more rights and protections under US law and you will need to be prepared for potential issues.
5. The amount of onboarding paperwork increases.

On a positive note, you will have more control over your tutors, can safely assign curricula, train tutors on tutoring best practices, and will most likely sleep better at night knowing that your risk of an audit is fairly minimal.  

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