In Kurek v. Commissioner, T.C. Memo 2013-64, the U.S. Tax Court held that a general contractor should have treated construction workers on his projects as employees rather than independent contractors. During the tax year at issue, Mieczyslaw Kurek hired approximately 30 workers to assist him on various home renovation projects. None of the workers worked full time for Mr. Kurek, and he paid them on a project-by-project basis. He paid each worker a flat fee based on the work completed for a particular job. The workers, in turn, set their own hours and work schedules. Mr. Kurek supervised the workers’ progress on a project and made frequent visits to the worksite. The construction workers worked with other construction groups, not just with Mr. Kurek.
Additionally, the workers brought their own sets of small tools to the worksites. Mr. Kurek did not reimburse the workers for their tools. Mr. Kurek did, however, buy or rent all of the larger tools, which he would leave at the worksites. Mr. Kurek purchased materials needed for the projects, and the homeowners would reimburse him. Occasionally, workers purchased lightweight materials as needed during the project, and Mr. Kurek would reimburse them.
Mr. Kurek did not sign independent contractor agreements with the workers. He did not carry unemployment insurance or workers’ compensation insurance for the workers, nor did he offer the workers any employee benefits. Most importantly, Mr. Kurek did not issue IRS Form 1099-MISC or Forms W-2 to any of the workers for the periods at issue. After an employment tax audit, the Internal Revenue Service (IRS) determined that the workers were Mr. Kurek’s employees and that he should have paid Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, as well as income tax withholdings on the workers’ wages. Mr. Kurek appealed the IRS’s finding to the U.S. Tax Court.
The Court looked to well established principles of common law for guidance:
The right of the principal to exercise control over the agent, whether or not the principal in fact does so, is the “crucial test” for the existence of an employer-employee relationship. Weber v. Commissioner, 103 T.C. at 387; Atl. Coast Masonry, Inc. v. Commissioner, T.C. Memo. 2012-233, at *15. Under the common law, an employer-employee relationship exists when the principal has the right to control and direct the service provider regarding the result and how the result is accomplished. Secs. 31.3121(d)-1(c)(2), 31.3306(i)-1(b), 31.3401(c)-1(b) Employment Tax Regs. The principal need not actually direct or control the manner in which the services are performed; the principal need only have the right to do so. See Weber v. Commissioner, 103 T.C. at 388; Twin Rivers Farm, Inc. v. Commissioner, T.C. Memo. 2012-184, slip op. at 7. Similarly, the principal need not set the worker’s hours or supervise every detail of the work environment to control the worker. Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 270 (citing Gen. Inv. Corp. v. United States, 823 F.2d 337, 342 (9th Cir. 1987)). Workers who set their own hours are not necessarily independent contractors. Id.
Despite the presence of several factors in favor of independent contractor status, the Court found that the workers should be classified as Mr. Kurek’s employees because Mr. Kurek failed to prove that he did not have the right to control the workers. Although the workers set their own hours and provided their own tools, Mr. Kurek set deadlines and monitored their work, and regularly visited the worksite. The Court found that Mr. Kurek: (1) had the ultimate authority in instructing the workers as to their job responsibilities, (2) had the right to approve the quality of their work, and (3) paid them weekly rather than at the end of the project. Moreover, only Mr. Kurek communicated with the homeowners, and he alone was responsible for the project’s success.
Additionally, the Court considered whether Mr. Kurek was entitled to relief under Section 530 of the Revenue Act of 1978, which provides relief if the principal satisfies the following requirements: (1) the principal has not treated the worker as an employee for any period; (2) the principal has consistently treated the worker as not being an employee on all tax returns for periods after December 31, 1978; and (3) the principal had a reasonable basis for not treating the worker as an employee. The principal must satisfy all three requirements to qualify for relief under section.
Ultimately the Court held that Mr. Kurek did not qualify for relief under Section 530 because he did not file Forms 1099 for any of the workers, which is a required element of the statutory safe harbor.
