I'm paraphrasing the 1944 tune "Is You Is or Is You Ain't My Baby?", co-written by Louis Jordan and Billy Austin, to point out that employee classification is more of a higher priority than ever before.

In employer terms, it's all about whether a worker is an employee or an independent contractor.

More organizations than ever before are active in dealing with the issue of misclassification of workers, including the Internal Revenue Service, the Department of Labor, state tax departments, unemployment agencies, workers' compensation boards and the National Labor Relations Board.

The federal government estimates that misclassification of employees as independent contractors will cost the Treasury Department more than $7 billion in lost payroll tax revenues over the next 10 years.

This concern has resulted in information-sharing agreements between the IRS and DOL, and between the IRS and state taxing authorities, to help identify companies with misclassification issues.

These agreements allow these federal and state agencies to help each other collect taxes, impose excise taxes and penalties on companies who misclassify employees, and to require their participation in employee benefit plans and unemployment compensation programs.

The Employee Misclassification Prevention Act was introduced in the Senate and House on April 22. The act seeks to amend the Fair Labor Standards Act so that worker misclassification is a violation of federal law. The act also requires employers to maintain records reflecting hours worked and wages paid to independent contractors.

Four types of workers

But sometimes the business relationship employers have with their workers isn't clear- cut. In fact, it may be one of four types, as explained by the IRS on its website:

1. Independent contractors. People such as lawyers, contractors, subcontractors and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees.

However, whether such people are employees or independent contractors depends on the facts in each case. Generally, an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

2. Employee (common law employee). Under common law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is the case even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

3. Statutory employee. If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute for certain employment tax purposes if they fall within any one of the following four categories and meet three conditions described under Social Security and Medicare tax laws:

* A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.

* A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.

* An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.

* A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed for you must be the salesperson's principal business activity.

4. Statutory nonemployee. There are generally two categories of statutory nonemployees: direct sellers and licensed real estate agents. They are treated as self-employed for all federal tax purposes, including income and employment taxes, if:

* Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked.

* Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.

If you are at all uncertain about a worker's status, consult a qualified tax adviser. The financial cost of making a mistake can be huge.