First, the legal disclaimer: This is not a legal advice column! I can’t give you legal advice. This column is reserved simply for personal observations made during my more than 20 years of providing legal advice to various companies.
In this installment, I’m going to discuss the differences between hiring independent contractors versus hiring employees. Let me start by asking a simple question: Would you rather hire an employee to work for you, and worry about paying workers’ compensation premiums, unemployment taxes, payroll taxes and benefits, as well as properly calculating overtime; or would you prefer simply to commission an independent contractor and pay that person solely for the work itself? The answer is obvious. Hiring an independent contractor is much easier than hiring an employee.
Unfortunately, that practice can land you in a lot of hot water.
This topic is getting a lot of attention right now. The IRS, Department of Labor and many state agencies are taking aim at businesses that claim the use of independent contractors. Those agencies are looking to enforce a litany of civil and even criminal penalties that can apply if a worker is misclassified as an independent contractor instead of an employee. Why? Because they want your payroll taxes and unemployment insurance payments! And it’s not just government agencies that can cause trouble. The misclassified employees themselves also have successfully sued their employers and recovered monetary damages for unpaid overtime, health benefits, wrongful termination, discrimination, retirement benefits and workers’ compensation.
Hiring an independent contractor is much easier than hiring an employee.
So if you are ever faced with an audit, how do you distinguish between an independent contractor and an employee? That determination generally hinges on the amount of control you have over an employee, which the IRS has distilled down to the 20-point test included below. The test’s usefulness is nebulous, as the 20 points are intended only as a guide and the IRS says the importance of each point depends on the individual circumstances; nevertheless, these points may be helpful in determining whether you, as the employer, maintain enough control to show an employer-employee relationship.
If you answer “Yes” to the first four questions, you’re probably dealing with an independent contractor; “Yes” to any of questions 5 through 20 indicates your worker is probably an employee.
1) Profit or loss. Can the worker make a profit or suffer a loss as a result of the work, aside from the money earned from the project? (This should involve real economic risk, not just the risk of not getting paid.)
2) Investment. Does the worker have an investment in the equipment and facilities used to do the work? (The greater the investment, the more likely the independent contractor status.)
3) Works for more than one firm. Does the person work for more than one company at a time? (This tends to indicate independent contractor status, but isn’t conclusive because employees can also work for more than one employer.)
4) Services offered to the general public. Does the worker offer services to the general public?
5) Instructions. Do you have the right to give the worker instructions about when, where and how to work? (This shows control over the worker.)
6) Training. Do you train the worker to do the job in a particular way? (Independent contractors are already trained.)
7) Integration. Are the worker’s services so important to your business that they have become a necessary part of the business? (This may show that the worker is subject to your control.)
8) Services rendered personally. Must the worker provide the services personally, as opposed to delegating tasks to someone else? (This indicates that you are interested in the methods employed, and not just the results.)
9) Hiring assistants. Do you hire, supervise and pay the worker’s assistants? (Independent contractors hire and pay their own staff.)
10) Continuing relationship. Is there an ongoing relationship between the worker and yourself? (A relationship can be considered ongoing if services are performed frequently, but irregularly.)
11) Work hours. Do you set the worker’s hours? (Independent contractors are masters of their own time.)
12) Full-time work. Must the worker spend all of his or her time on your job? (Independent contractors choose when and where they will work.)
13) Work done on premises. Must the individual work on your premises, or do you control the route or location where the work must be performed? (Answering no doesn’t by itself mean independent contractor status.)
14) Sequence. Do you have the right to determine the order in which services are performed? (This shows control over the worker.)
15) Reports. Must the worker give you reports accounting for his or her actions? (This may indicate a lack of independence.)
16) Pay schedules. Do you pay the worker by hour, week or month? (Independent contractors are generally paid per job or by commission, although by industry practice, some may be paid by the hour.)
17) Expenses. Do you pay the worker’s business or travel costs? (This tends to show control.)
18) Tools and materials. Do you provide the worker with equipment, tools or materials? (Independent contractors generally supply the materials for the job and use their own tools and equipment.)
19) Right to fire. Can you fire the worker? (An independent contractor can’t be fired without exposing you to the risk of a breach-of-contract lawsuit.)
20) Worker’s right to quit. Can the worker quit at any time, without incurring liability? (An independent contractor has a legal obligation to complete the contract.)
States often look to additional factors as well that have been developed in their own case law or by statute. And again, these factors tend to hinge on the degree of control that you exercise over the worker: More control over the worker increases the likelihood that the worker would be classified as an employee; less control increases the likelihood that a worker could be classified as an independent contractor.
More control over the worker increases the likelihood that the worker would be classified as an employee; less control increases the likelihood that a worker could be classified as an independent contractor.
Contractors advertise their services to others, and have their own business cards; they carry their own insurance, including workers’ compensation insurance; they may have their own employees working for them; they may be incorporated, or have a formal DBA (“doing business as”). Additionally, contractors don’t work under your advice; they know how to perform a job, they have their own tools, and they suffer the monetary consequences of their own poor work or bad business decisions.
If you are hiring independent contractors, consider making the following changes in your relationship with the workers in order to help tip the balance in your favor if you are called to task on the issue. First, have a written independent contractor agreement (the agreement alone won’t be determinative, but it can help). Consider including as contractual requirements some of the above attributes that point to a contractor classification, e.g., contractually require them to carry their own insurance and incorporate. Next, if possible, don’t insist the contractors perform the work at your place of business or conform to any particular time schedule. Contractors work for other people — not just you — so they typically work under deadlines, not tightly controlled business hours. And because they get paid by the job, they don’t get paid if their work doesn’t pass muster. And, as always, be sure to consult your friendly employment lawyer or tax adviser if you are unsure about the proper classification.
Do you have a laboratory-related legal question, issue, problem or policy you would like to see discussed? Please contact Gary the Lawyer with your ideas at firstname.lastname@example.org.