There is a growing trend of employers hiring employees as independent contractors for tax and benefit savings to the business. However, proper classification of workers as employees or independent contractors is essential because of potential federal and state tax, benefits, and overtime liabilities. First, an employer needs to evaluate the position and work to be performed and then balance that with the control and independence allowed to the worker in fulfilling his or her duties and responsibilities (as discussed below). It is recommended that an employer consult an experienced attorney regarding this status question as it involves legal precedence and potential liability.
Independent contractor status is evaluated by the federal and state agencies and courts, many times after the fact because a claim contesting the status was brought by an employee or red flags regarding tax issues have been raised by a governmental entity, on a behavioral and financial relationship control basis. The test regarding independent contractor status is a kind of balancing test taking factors regarding those two bases into consideration. The more independence and control the employee has over the work process, product, tools, and billing, the more likely he or she will be classified as an independent contractor and less like an employee.
Behavioral control measures the direction and control of the work and product, and primarily include the following considerations: training (or the lack of such training required), instructions to contractor, contractor has his or her own employees, term of relationship with the employing company, work schedule control, potential reports, location(s) of work, and control of work process.
Financial control measures the direction and control of business aspects and payment of the workers’ activities, and primarily include the following considerations: payment schedule and frequency (by the job being less controlled than a regular payment schedule), expense reimbursement, ownership and use of premises, equipment and supplies, and ability of contractor employee to work for others at the same time and provide services to the public as an individual as well.
The relationship of the parties is generally shown by the parties’ agreements and actions with respect to each other, paying close attention to those facts that show not only how they perceive their own relationship, but also how they represent their relationship to others. If the employment situation meets the requirements for the employee to be an independent contractor, the employer will want to set out clear terms, establishing independent contractor status, in the employment agreement/contract. Thus, the most important contract provisions are those documenting the individual’s independence.
Forrest P. Merithew, Attorney at Law, works with developing and existing business in liability analysis and contract needs, including employment contracts and business consulting. If you are considering changing your employees’ status or developing a new status of employee for your business it would benefit you to contact a knowledgeable attorney to discuss the issues and requirements you may face and to work towards meeting regulatory and administrative requirements.