Making Sure Independent Contractors Are Independent

By Thoran Towler, Allison MacKenzie, Ltd.

A common, but avoidable pitfall in any business is the classification of workers – independent contractor or employee. This blog entry seeks to clarify the distinction between employees and independent contractors and to serve as a helpful guide in making this very important determination.

An independent contractor is a self-employed person who agrees with a client to complete work for a fee according to the means or methods of the self-employed person. The self-employed person is not subject to the supervision or control of the client, except as to the result of the work. A good example of this type of scenario is the relationship between a contracted cleaning company and a law firm. A law firm will often contract out the work of cleaning the offices to an independent cleaning company.  These cleaners usually come to the law firm after business hours, work without supervision and leave when they believe the work has been completed. The cleaners are obviously independent contractors. However, in regards to the other workers in the office (i.e. receptionist, office administrator, legal assistant, etc.) this same relationship does not exist. These workers are considered employees of the law firm, not independent contractors. Employers often want to know how to make the distinction between employee and independent contractor when the difference between the workers isn’t so clear.

The main distinction between employees and independent contractors is the level of control. The factors to be considered in understanding this distinction generally fall into three categories: behavior, financial, and relationship. Each factor must be weighed to determine the kind of relationship that exists and the liability of each party in that relationship. No factor is more important than any other. The relationship must be considered as a whole.

Behavior

Behavior refers to facts that show whether there is a right to direct or control how the work is done. This includes the type of instruction given (i.e. when and where to do the work, what equipment to use, etc.), the degree of instruction (how detailed are the instructions), evaluation (whether the work is evaluated based on how the work is performed versus the result), and training (if training to do the work is provided or not).

Financial

Financial refers to facts that show whether or not there is the right to control the economic aspects of the worker’s job. This includes the significance of the investment (whether the worker has to make a significant investment in the tools used to complete the work), unreimbursed expenses (expenses incurred regardless of whether work is currently being performed), the opportunity for profit or loss (the possibility of incurring a loss is directly tied to the work), services available to the market (whether the worker can pursue other work), and the method of payment (payment of hourly, weekly, or monthly wages versus a flat fee).

Relationship

Relationship refers to facts that show how the worker and business perceive their relationship to each other. This includes written contracts (how the parties have defined their relationship), employee-type benefits (whether the worker receives insurance, retirement, vacation, etc.), permanency of the relationship (whether the employment is project-specific or for an indefinite period of time), and services provided key to the business (whether the work becomes part of/owned by the business or not).

Why is this determination important? There are very serious consequences if an employee is misclassified as an independent contractor with no reasonable basis for doing so. The most significant consequence is that the business may be liable for any and all employment taxes of that worker for the length of their employment (26 U.S.C. § 3509). There may also be penalties and fines assessed by the U.S. Department of Labor for failing to pay proper overtime compensation, unemployment insurance taxes or workers’ compensation premiums.  Also, if the Nevada Labor Commissioner’s office finds that you misclassified employees, you are guilty of a misdemeanor.

Take some time to think about how you interact with the independent contractors you encounter in your professional life and be mindful of the level of control. The level of control exerted is a primary factor a court will look at if you find yourself defending a claim for misclassification.

If you have any questions or are interested in speaking with me about independent contractors, please feel free to E-mail me at [email protected].