Enter to open, tab to navigate, enter to select
Is Your Contractor Independent? Or Could You Be a Defendant?
Practical Law Legal Update 9-573-4030 (Approx. 4 pages)
Is Your Contractor Independent? Or Could You Be a Defendant?
by Practical Law Labor & Employment
| Published on 08 Jul 2014 • USA (National/Federal) |
Resources to help employers entering independent contractor relationships, particularly on avoiding worker misclassification. It includes a discussion of tests used to determine employee status, such as the 20-factor and Darden tests.
Many organizations avoid significant tax and other liabilities every year by classifying certain workers as independent contractors instead of employees. Independent contractors are workers who contract with individuals or entities to provide services. An independent contractor does not work regularly for any single company and is not an employee.
Independent contractors can provide a significant financial benefit to employers because they are not entitled to many of the same protections as employees. For example, in contrast to employees, a company has no:
- Obligation to comply with the Fair Labor Standards Act for independent contractors, such as by paying overtime.
- Obligation to provide benefits to independent contractors, such as health care insurance coverage, paid time off and other benefits commonly provided to employees.
- Employment tax obligations to the IRS. Independent contractors are issued IRS Form 1099-MISC.
- Insurance obligations, such as unemployment or workers' compensation insurance coverage that employers typically must provide for their employees under applicable state law.
- Obligations under many other applicable federal, state and local employment laws, including:
- health and safety laws;
- wage and hour laws; and
- anti-discrimination laws.
However, federal and state government agencies aggressively enforce rules relating to the classification of workers. Improper classification of workers as independent contractors can result in steep penalties. Audits of independent contractor classifications and lawsuits alleging improper classification have been steadily increasing in recent years.
A company simply referring to a worker as an independent contractor in a written agreement does not protect itself from a legal challenge. Even if the parties designate and document a particular arrangement as an independent contractor relationship, the IRS, the Department of Labor, state government agencies and courts examine the nature of the relationship to determine proper classification and may find that the worker is actually an employee.
How a worker is classified varies depending on the facts, but greatly depends on the company's degree of control over the individual worker. For example, the IRS's general rule is that an individual is an independent contractor if the person from whom the services are performed has the right to control or direct only the result of the work, not the means and methods of accomplishing the result. In making this determination, the IRS examines three general categories:
- Behavioral control, meaning the right to control the manner in which the work is performed.
- Financial control, meaning the right to control economic aspects of a worker's activities.
- The relationship between the parties.
For a more detailed discussion, see Practice Note, Independent Contractor Classification: The IRS Standard.
Other tests commonly used for determining independent contractor or employee status include:
- The 20-factor common law test (see Practice Note, Independent Contractor Classification: The Common Law 20 Factor Test).
- The common law Darden test (see Practice Note, Independent Contractor Classification: Common Law Darden Test).
- The economic realities test (see Practice Note, Independent Contractor Classification: Economic Realities Test).
Practical Law recently published Independent Contractor Toolkit, which has many helpful resources to help employers properly engage in independent contractor relationships and includes:
- Further information about compliance with the above tests.
- Standard documents for use in documenting an independent contractor relationship.
- Information on state law independent contractor requirements.