Employment Law And Employee Travel

Money Matters - Employee TravelWhen employees are working in an office, shop, warehouse, or otherwise within your immediate supervision, the legalities of employment and tax law are clear. Employees generally must work within safety and legal guidelines, for which they earn a paycheck. On the other hand, when employees travel, whether running errands on an occasional basis, running errands on a daily basis, working locally or engaging in long haul transportation, the legalities and tax rules change. There are many issues involved: employee vehicle usage, employer-provided vehicle usage, administration and paperwork requirements, travel pay, reimbursement, frolic and detour, and abuses.

As an employer, you’re responsible for your employees while they are out travelling on the road. It is also your responsibility to know the laws behind employee travel and how to limit your liabilities where applicable.

Threshold Question: Employee or Not?
One of the most difficult questions for an employer to answer under the current federal tax law is “Who qualifies as an independent contractor?” Yet, if an employer does not answer this question correctly, then the employer may find his/her company liable for taxes, penalties and interest when the IRS reclassifies an independent contractor as an employee. Over the course of the last seven years, the IRS has collected $58 million in taxes due to reclassifying over 400,000 independent contractors as employees. Therefore, it is extremely important to know the difference between an independent contractor and an employee. Unfortunately, Congress has not provided any clear legislative guidance on this issue. Because of this lack of guidance, an employer must rely on a myriad of special rules, exceptions, legislative intent and common law tests. Obviously, reading these rules leaves a person more confused about the difference between an independent contractor and an employee.

Since there is no clear Congressional guidance defining when a worker is to be classified as an employee, the IRS must depend upon its own regulations, revenue rulings and letter rulings to make a determination. The IRS regulations basically ask a single key question: Does the business have “control” over the worker?  If “control” is present, then the worker is an employee. If “control” does not exist, then the worker may be classified as an independent contractor.

An employer has control over a worker when he/she has the right to control and direct the worker’s services. This means not only does the employer have control over the results of the services, but also the details and means by which the results are accomplished. Whether or not an employer actually controls or directs the worker is irrelevant. It is the right to control the way in which the services are performed that is the key in determining the worker’s status. If an employer only controls the results of a job and not the means by which it is accomplished, then the worker is not an employee. However, if the worker only works for one employer and has no other jobs, then that employer has the ability to control the worker’s actions and the worker will be classified as an employee.

Recognizing that this is not an easy concept to grasp, the IRS has reviewed court cases to find common factors which indicate control over the worker. These common factors have then been incorporated into 20 questions that are used to determine whether an employer controls a worker

  1. Is the worker required to comply with instructions?
  2. Is the worker provided with training?
  3. An employee who travels to the office, picks up equipment, then goes to a work site to perform the day’s activities is working from the time s/he first arrives at the office.

    Are the worker’s services integrated into the business operations?

  4. Must the worker render the services personally?
  5. Who has the power to hire, supervise and pay assistants?
  6. Is there a continuing relationship?
  7. Are there set hours of work?
  8. Is there a full time work requirement?
  9. Is the work done on the premises of the business?
  10. Is the order or sequence of the work established?
  11. Are oral or written reports required?
  12. Is payment made by the hour, week or month?
  13. Who pays the worker’s business and/or travel expenses?
  14. Who furnishes the worker’s tools and materials?
  15. Has the worker made a significant investment for work facilities?
  16. Will the worker realize a profit or loss from the activity?
  17. Does the worker work for more than one business at a time?
  18. Are the worker’s services available to the general public?
  19. May the worker be discharged?
  20. Does the worker have the right to terminate the relationship at any time?

The Safe Harbor Rules
Even if a business fails the 20-question common law test, it still may be able to classify a worker as an independent contractor under the Safe Harbor Rules. In 1978, Congress passed a law that is intended to remove some of the uncertainty found in the 20-question test. This legislation is referred to as “Section 530 Safe Harbor Rules” or Section 530 of the Revenue Act of 1978.

If a worker meets the requirements under the Section 530 test, then he/she is deemed not to be an employee even though, under common law, the worker could be classified as an employee. The requirements are as follows:

  1. The business has a reasonable basis for not treating the worker as an employee; or
  2. The employer does not treat the worker, or any worker in a similar position, as an employee for federal payroll tax purposes; and
  3. After 1978, the business has filed all federal tax returns (1099s) that have been required to be filed on a basis consistent with their treatment of the worker not being an employee.

To take advantage of the Safe Harbor Rules, the employer should meet all three requirements.

Second Threshold: Is the Worker Properly Classified as an Exempt Worker or Hourly Employee?
First, the rule establishes its own threshold test for eligible employees. It is simply whether the employee earns over $455 per week. If the employee does not earn above this amount, the employee does not qualify for salary and is eligible for overtime. However, this test does not apply to outside salespeople.

Second, the employee must fit into an exemption as described by the Department of Labor to qualify for a salary basis compensation payment. The employee can fit into that of being highly compensated, an executive, an administrative worker, a professional or an outside salesperson.

  1. Executive Exemption – This exemption has been broadened from the old definition. Their primary duty must be to manage an enterprise or unit including two full time employees. Part time employees do not count.
  2. Professional – This definition has also been broadened. A professional must do work which requires the application of advanced knowledge. The advanced knowledge can generally be gained from a bachelor’s degree, but can also be gained from experience. Nurses and chefs now fit the definition.
  3. Administrative – Not much has changed in this category. The administrative duties must be related to management and the employee must exercise discretion and judgment to qualify for the exemption.
  4. Highly Compensated – If an employee is making over $100,000 per year, they qualify as being highly compensated and are exempt under less scrutiny for examination purposes.
  5. Outside Salesperson – This also has changed. Instead of the old test of greater than 80 percent of the duties being performed away from the office, the new test calls for it being the primary duty only. Therefore, if the employee performs 50 percent or more of his or her job away, it is primary. Less than 50 percent can qualify in limited instances depending on importance.

Getting to the Answers under Travel Pay
There are some “grey areas” about when the Fair Labor Standards Act requires travel time to be treated as working time. However, as a general rule, “home to work” and “work to home” travel time is not work time, and this is true even if the “commute” is longer than normal, to or from a different work site than normal, or the employee uses a company vehicle for the trips. This assumes that the employee is performing no other work activities while commuting. Time spent by an employee writing a report is work time, even if it happens to occur while the employee is riding on a bus (or airplane) to or from work. Travel time which is “all in a day’s work” is work time. Usually, this means that travel time is work time if it occurs between when the employee first arrives at the first work site and before the employee leaves the last work site at the end of the work day. The first work site is the place where the employee first performs work activities. For example, an employee who travels to the office, picks up equipment, then goes to a work site to perform the day’s activities is working from the time s/he first arrives at the office. Picking up the equipment needed to do the day’s activities is the first work activity of the day, and therefore the office is the first work site of the day.

Commuting vs. For Pay Home to Work Travel
An employee who travels from home before the regular workday and returns to his/her home at the end of the workday is engaged in ordinary home to work travel, which is not work time.

It is extremely important to know the difference between an independent contractor and an employee.

Home to work and work to home is commuting. As a general rule, the word commuting, under its proper definition, is never work time and is therefore not a compensable activity. Even if the employee has an extraordinarily long work commute, commuting is not work time. Extraordinarily long commutes can include commutes through weather, mileage, traffic, natural disaster. These events and circumstances happen.

There are examples of when home to work travel is a compensable activity. Such occurrence happens when: An employee is driving a specially modified vehicle; on an emergency call; traveling between employer and supplier for benefit of employer; one-day assignments.

Home to Work on a Special One-Day Assignment in Another City: An employee who regularly works at one location in one city is given a special one-day assignment in another city and returns home the same day. The time spent in traveling to and returning from the other city is work time, except that the employer may deduct/not count that time the employee would normally spend commuting to the regular work site.

If an employee normally works in office, then on one day travels to a client’s location, this is compensable time for the employee.

Between Jobs  (Travel that is All in a Day’s Work): Time spent by an employee in travel as part of his/her principal activity, such as travel from job site to job site during the workday, is work time and must be counted as hours worked.

Running Errands: This is generally the travel an employee performs infrequently for the benefit of the company. The time involved is compensable to that employee as hours worked. However, there is no mandate that the employee be paid mileage or other travel expenses.

Overnight Travel/Travel Away from Home Community: Travel that keeps an employee away from home overnight is travel away from home. Travel away from home is work time when it cuts across the employee’s workday. The time is not only hours worked on regular working days during normal working hours but also during the same hours on nonworking days.

Stay Straight on the Road
It is absolutely essential that employers get worker classification and pay for employees while traveling, correct. Landing a conclusion on the wrong side of the analysis doesn’t go away because the pay period is over or the calendar year is over. Statute of Limitations are years long. What you do today could end up impacting you and your business potentially years down the road.

Gases and Welding Distributors Association
Bart Basi Meet the Author
Bart A. Basi, Ph.D. is a CPA and attorney at The Center for Financial, Legal & Tax Planning Inc., based in Marion, Illinois, and on the Web at www.taxplanning.com.