• Independent Contractor Classification of Recreation Instructors and Board Members
  • June 22, 2011 | Authors: Isabel Cesanto Safie; John D. Wahlin
  • Law Firm: Best Best & Krieger LLP - Riverside Office
  • Earlier this month, the IRS agreed that the City of Dana Point could continue to classify recreation instructors as independent contractors because the City had established that it was entitled to Section 530 relief. The agreement was documented in a stipulated decision entered by the United States Tax Court.

    Section 530 is a safe harbor available to taxpayers which allows a taxpayer to continue to treat workers as independent contractors whether or not the workers should be classified as employees. It has been used by public agencies challenging claims by IRS auditors that certain workers, such as recreation instructors and board members, have been misclassified as independent contractors.

    Relief under Section 530 is available if the taxpayer can establish all three of the following requirements:

    • The taxpayer has always treated the workers, and similarly situated workers, as an independent contractors;
    • All applicable federal tax returns (i.e., Form 1099) have been filed; and
    • The taxpayer has a reasonable basis for treating the workers as independent contractors.  

    A taxpayer can demonstrate that it has a reasonable basis by demonstrating that it relied on one of the following:

    • Judicial precedent;
    • Prior rulings;
    • A prior audit; or
    • Industry practice. 

    The City of Dana Point was able to demonstrate that it has always treated recreation instructors, and other similarly situated workers, as independent contractors, has filed all applicable federal tax returns and that it classified recreation instructors as independent contractors in accordance with industry practice.

    Other public agencies have successfully pursued similar relief on the basis of industry practice.

    Invoking Section 530 relief does not mean that a public agency is conceding that a recreation instructor or board member is an employee. Instead, it is an alternative argument in the event that the IRS rejects the substantive argument that a worker is an independent contractor. As you likely know, while the employee/employer versus independent contractor determination is statutory in certain cases, for the most part it is based on the common law employee test, which says that the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the worker - not only as to the result, but also as to the details and means by which that result is accomplished.