Q&A: Time tracking for independent contractors

Question

Can a business require 1099 workers to clock in and track time if their compensation is based on projects being completed within a set amount of time? While the workers are 1099, there is an expectation that so much of their work will be completed in a reasonable amount of time. Compensation is not tied to time, meaning the worker is not penalized if they arrive past 8 a.m. or leave prior to 5 p.m. Rather, time is a method of tracking that the worker was actually at a job site and did not spend more time than allocated per site. Does that kind of worker relationship cross the line into that of a W2 employee instead?

Answer

There are no federal laws barring an employer from paying an independent contractor through its employee payroll system or requiring an independent contractor to track time worked through the employer’s time-tracking program used for employees. However, these practices that use the same tools used to pay and track regular employees for an independent contractor may call into question whether the contractor really meets the independent contractor criteria. Improper classification of the worker as an independent contractor may result in liability for payroll taxes as well as under wage and hour, discrimination, unemployment compensation, workers’ compensation laws, and other state and federal laws.

None of these tests specifically address using the employee payroll system to pay an independent contractor or using the employer’s time-tracking program for employees to track the independent contractor’s work hours. Arguably, then, if the independent contractor is set up in a separate group of the employee payroll system dedicated to independent contractors and no payroll taxes are withheld since they are not employees, and if the employer can show that it is only using the employee payroll system for convenience, it may not consider a factor favoring employee status and cutting against the worker’s independent contractor status. Similarly, if the employer has a legitimate work-related reason for tracking the contractor’s work hours using the employee tracking system, such as to account for the time to the employer’s client, this rationale also may be considered a factor favoring employee status and cutting against the worker’s independent contractor status.

But, if the employer is using the employee tracking system to track hours to pay the independent contractor, this use could be considered a factor favoring employee status. As noted by the IRS in its IRS Publication 15-A, payment on an hourly, weekly, or monthly basis generally indicates an employer-employee relationship (except for jobs such as lawyers where it is common to pay a contractor on an hourly basis), while payment by the job or on a straight commission indicates the worker is an independent contractor.

You indicated that these independent contractors are being paid on a project basis. Nevertheless, is likely more prudent to not use any employee payroll or tracking systems for the independent contractor to prevent potential red flags for the independent contractor’s status. However, as this is only one factor to consider, the employer should consider all test factors when determining whether these workers are properly designated and identify any potential liability. To ensure proper use of the independent contractor classification, you should consult with an attorney on this matter.

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