INDEPENDENT CONTRACTORS

One of the inquiries we often receive is whether a company can regard someone providing services to it as an “independent contractor”.  There are advantages and disadvantages to the designation, but most often it is a means by which companies can avoid the expense, time and paperwork of employment, as well as the exposure to claims by workers.  For the worker’s part, it is a method of minimizing taxes and withholding so the check he receives is bigger than the one he would have received were he an employee.

It is really something the advisability of which has to be determined on a case by case basis.  The problem with the mischaracterization of a service provider as an “independent contractor” rather than as an “employee”, is that a company can be exposed to severe penalties if the characterization is not correct.  For example, if an “independent contractor” is found to actually be an employee, the company may be required to make up for the withholding it failed to do when paying the service provider, as well as pay penalties and interest.  If other employees have benefits the “independent contractor” was not extended, he may have to be reimbursed for the value of those benefits.  It can be a very expensive proposition.  That is why it is important to be very careful when attempting to forge an independent contractor relationship with someone in a close case.

Courts have articulated a variety of factors in determining whether a person is an independent contractor rather than an employee.  No one factor is determinative and judges tend to weigh them in making a decision.  However, the more of these factors that are present, the more likely the person will be found to be an employee rather than an independent contractor.

The first factor is the place at which the work is to be done.  If it is in the company’s facility, the service provider is more likely an employee.

The second factor is control of the service provider’s work.  If the work is to be done under the supervision and at the direction of the company in the details and manner in which it is to be performed, the provider would generally be found to be an employee.           If the company sets the time at which the work is to be done, for example, if the provider is to be present at a certain time and on certain days to do his work, the providers is more likely to be considered an employee.

These are referred to as the “time, place and manner” factors and if all of these are present, it is likely the provider will be found to be an employee.

But there are other factors, as well.

An important factor is the tools of the trade.  If the company provides the tools through which the service provider accomplishes his work, such as computers, tools, equipment, supplies, paper, copiers, and so forth, it is more likely the provider will be considered an employee.

If the worker can be terminated without cause, that generally means the work is “at will” and that is the mark of an employee rather than an independent contractor.

On the other hand, if the provider must have a certain level of skill, for example, if the provider has a professional license or high skill credential, that argues for independent contractor designation.

If the provider has other customers to whom he provides the same type of service, that lends itself to a finding that the provider is an independent contractor.

If the provider is paid by the job, as opposed to by an element of time such as by the hour, day, week or month, that argues for independent contractor status.

If the work provided by the service provider is not the main work of company, the provider is more likely to be an independent contractor.  For example, if an automobile manufacturer were to hire on someone to install fenders on cars, it would be hard to characterize that person as an independent contractor because the installation of fenders is an integral part of auto manufacturing.  But if the manufacturer were to bring on someone to provide accounting services, that person could be an independent contractor since accounting, while important to auto manufacturing, is not a part of its core business.

If the service provider collects any money or fees for the work he is doing and simply remits back some of that to the company, that is the mark of an independent contractor.

The most important thing to remember is that if you provide the means, location and tools to do the work hired and direct how it is done, pay by a parcel of time and determine when the worker should do his work, that worker is probably an employee.

The best way to avoid the problem is to have a carefully drafted contract that specifically sets out in writing the factors that will show that the service provider is an independent contractor and carefully define the basis on which he is to be paid and that he has control over all aspects of his work, except the result.

It can be a delicate balance and it is one that is receiving greater scrutiny at all levels of government.  The California Department of Industrial Relations, for example, went after theatres some years back on the basis that the actors they hired for limited run plays were actually employees.  The theatre paid a dear price when it was determined that because the actors were told where to appear, when to appear and  how to act and were given the props and costumes through which they did their performances, they were employees. They had to pay huge amounts to those who regarded themselves as independent contractors, as well as penalties for having failed to properly characterize them.  This delicate balance is also one that has generated expensive class action lawsuits that have cost companies millions when they have guessed wrong.  We can help you navigate through the rocks and shoals if you are considering bringing on independent contractors to assist in your business.  But you must not try to do it alone.

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