Independent Contractor or Employee…does it matter?

Yes, it matters.

President Obama says it matters.  Last year he promised increased enforcement of the rules which limit when employers may designate a worker an independent contractor. Both the law and the President assert that some employers are misclassifying workers in an effort to reduce employer costs and liability.  Of course there are other employers misclassifying workers from lack of insight on the issue but whether the misclassification is intentional or innocent, getting it wrong can be very costly in back taxes, penalties, fees, back pay, and overtime pay.  The best way to avoid misclassifying workers is to study the rules and with that insight, diligently and prudently apply the rules to all workers.  Here is a brief overview of some of the rules.

In true independent contractor relationships there is money to be saved and liability to be reduced.  Making an agreement for services with a worker characterizing her as an independent contractor may provide numerous benefits for the employer.  Those benefits take the form of tax advantages, reduction in liability, avoidance of workers compensation and unemployment claims, and ducking minimum wage and overtime claims.  Independent contractors may be an attractive alternative to hiring employees in some circumstances.

In evaluating whether a worker is an employee or an independent contractor, the primary test is whether the employer has the right to control the means and manner of performance of the work.  In evaluating the relationship with a worker, the more the employer controls the means and manner of employment, the more compelling the argument that the worker is an employee.  On the other hand, if there is evidence of little control over the worker, there may exist an independent contractor relationship.

Additional factors which contribute to evaluating a worker’s status include:  mode of payment, providing materials or tools, control of the premises where work is performed, right to terminate, withholding of income and social security taxes, whether the work is part of the regular business of the employer, the length of the relationship and the intent of the parties.

Another critical aspect in getting this determination correct focuses on whether the employer or the worker has the burden of providing the facts to support the existence of an independent contractor relationship.  There is a presumption that workers are employees (not independent contractors) and the burden of proving the existence of a true independent contractor rests with the employer.  In measuring the weight of that burden, employers evaluate the ingredients addressed above through the lens of the following questions the answers to which will influence your conclusion as to the proper classification of the worker.

Who cuts the check to compensate the worker?  Accounting departments ordinarily pay contractors while payroll departments pay employees.

In cutting the check, are taxes and social security withheld?  Employers have an obligation to withhold taxes and social security at the time employees are paid.

Does the worker report to a supervisor?  The frequency of employer contact with a worker may provide evidence of an employer-employee relationship.  Like the other variables discussed here, workers should be evaluated on a case by case basis before drawing any specific conclusions regarding their status.

What is the measurement of performance?  Independent contractors are measured by fulfilling the defined scope of work.  Employees may be scrutinized as much or as little as the employer determines.  More scrutiny of performance augers in favor of an employee classification.

Does she work hand in hand with other employees?  Five workers, comprised of an independent contractor and four employees, tasked with a series of common objectives, is evidence that the independent contractor is misclassified.

Does the worker use your tools?  As a general proposition independent contractors bring and use their own tools while employees use tools provided by the employer.

Did you give the worker a laptop or phone for their use?  Consider the spectrum of tools in the workplace which forces consideration of more than a shovel or hammer.

Does the worker offer his services to others?  Independent contractors ordinarily work for you and a bunch of other clients.

Does the worker’s contract include a job description or a defined scope of work? Documenting the relationship as an independent contract reveals the intent of the parties, but the inclusion of a job description in that contract describes the work of an employee.  Consistency demands that independent contracts describe expectations through a scope of work.

Does the worker attend orientation?  Employees attend orientation.

Is the worker entitled to extra pay for extra hours?  Employees may be entitled to extra pay for extra hours.  Independent contractors may be entitled to extra compensation for completing the scope of work quicker or better than expected.

Does the worker execute an acknowledgement of employer’s policies and procedures? Employees agree to follow employment related policies.  Having said that, employers must protect employees from misbehaving independent contractors (think sexual harassment) therefore the inclusion of promises in an independent contract which protect your employees from your contractors is a good idea.

Do you require workers to wear the employer’s uniform and sanctioned underwear? Uniforms are for employees.  Underwear is for employees and independent contractors.

Does the worker interact with you under her own corporate banner?  Independent contractors frequently interact by using a corporate or trade name.

Has the worker been drinking your coffee for a long time?  Employees drink your coffee everyday for years from a stained ceramic cup while loitering in the employee kitchen. Traditionally independent contractors are on site less than employees and the coffee is consumed from a styrofoam container.  The point, independent contractors do not report to your worksite everyday for years since most contractors work for others as well.

Does the worker have their own employer identification number (tax ID number)? Independent contractors frequently report income to the IRS under the umbrella of a separate employer identification number.

Is the worker licensed by the gaming commission as an employee or vendor? Independent contractors are likely vendors under the regulator’s rules.

Of course the list is not exhaustive in assisting your analysis of properly classifying a worker but it provides a good start in the conversation.

Recommendation:  Give President Obama the right answers to these questions and you may be able to classify a worker as an independent contractor.  However, if your answers are not consistent with the rules, your invitation to the White House will be revoked, you could get sued, investigated, audited and scrutinized.  With the benefit of the facts of the relationship, look beyond the independent contractor label and determine whether the label is correct or should be changed.  The burden is on you as the employer’s representative to get this right.

About the Author:

Richard McGee is a lawyer in Minneapolis, Minnesota who focuses his practice on gaming, gaming regulation, tribal employment and litigation in tribal, state and federal courts.  Richard has the privilege of working with tribes and tribal organizations on Human Resources matters including training.  Additionally, tribes ask Richard to address specific topics while incorporating the tribe’s related laws and policies into the sessions.  This is an invitation to engage Richard to produce and facilitate training for your tribe.