Payroll Clients May Ask- What is an Independent Contractor?

by:  Jonathan K. Driggs
Last month we discussed how misclassifying workers as independent contractors (ICs) is becoming increasingly risky due to increased scrutiny from government agencies like the U.S. Department of Labor.    This month we’ll discuss what it takes for working relationship to qualify for IC status.

First of all, it is important to understand that employee status is clearly the preferred status under the law—any worker can be treated as an employee, and the vast majority of workers should be.  The public policy reasons for this preference are pretty obvious, and include important things like the payment of employment-related taxes, and coverage for workers under workers compensation and unemployment insurance programs. For a worker to be classified as an IC, the business has the obligation to prove that the worker actually qualifies as an IC.

One problem, however, is that there isn’t a “one-size-fits-all” easy-to-apply test to determine which workers qualify as ICs.  Different enforcement agencies (e.g., IRS, U.S. Dept. of Labor, etc.) use different tests to determine which workers qualify, and these tests involve applying a fairly lengthy set of factors to each situation.  Despite the ambiguities, it is usually not too difficult to make an accurate assessment, especially when one remembers that IC status is by far the exception, rather than the rule, when it comes to classifying individual workers.

The following is a list of questions that can be useful to informally determine whether a worker meets IC requirements.  This list is by no means exhaustive—nor should an answer to one question be determinative (it usually involves weighing and balancing various factors)—but answering these questions can be a quick way to get a general sense for whether you’re dealing with an employee or an IC:

  1. Is the worker doing the type of work typically performed by an employee? Consider this question both from the angle of the company itself and the industry the company is in (what is typical for the industry?)  A “yes” answer is indicative of employment status.
  2. Is the relationship ongoing or short-term/occasional?  An ongoing relationship is indicative of an employment relationship, while short-term/occasional may be indicative of IC status.  One caution: the existence of a short-term relationship, in and of itself, is not enough to qualify a worker for IC status (other factors must be present).
  3. Is the work being performed central to the business of the company or more tangential in nature?  More central is indicative of an employment relationship, while more tangential may be indicative of IC status (e.g., a plumber who comes in to fix a leaky pipe is clearly doing work that is tangential to the products created by a software company).  While there can be legitimate exceptions, ICs typically don’t perform the work or services that a company is in the business of providing.  Rather, ICs tend to service or consult the company in general.
  4. Does the company exercise “employer-like control” over the worker?  Is the company setting work hours, managing performance like they would with an employee, and otherwise dealing with the worker in an employer-like fashion?  These are all indications of an employment relationship.
  5. Does the worker perform similar services for other business? Does the worker have his/her own business entity?  Does the worker provide his/her own tools and liability insurance? “Yes” answers to these questions can be indicative of an IC relationship.  To the contrary, if the worker is working “full-time” hours for just one business (especially for a longer/indefinite period of time), that is indicative of employment status.
  6. Does the worker receive employment-like benefits? (e.g., paid leave, health insurance)  A “yes” on this question is a pretty strong indication of employment status.

Keep in mind that it’s not what you call it, it’s what it is.  While having a formal IC agreement in place with the worker is helpful, ultimately, it’s not about labels, it’s about substance.  Employees cannot legally waive their rights to employment status if the nature of relationship does not meet IC requirements.

As mentioned in the previous month’s article, it is time for employers to “get real” when thinking about classifying workers as ICs.  While IC classifications can be legitimate, too many employers have gotten casual in this area when it is simply not worth the risk.  Ultimately, any business that wants to classify individual workers as ICs should have such arrangements carefully reviewed by legal counsel.

This article should not be construed as legal advice.

Jonathan K. Driggs is an employment law attorney with over 18 years of experience, including 3 years with the Utah Labor Commission.  www.jdriggslaw.com

Call an HR Attorney as often as you need, for a low, fixed monthly fee!  In partnership with Payroll Experts, Jonathan is offering his “HR Legal Compliance Service” to Payroll Experts clients at discounted rates.  For a low, fixed monthly fee, you can call Jonathan as often as you need to get answers to your HR legal compliance and employee relations questions.  Get rid of the attorney’s ticking clock!  For more information, please contact Payroll Experts at (801) 221-3732 and ask about the “HR Legal Compliance Service.”

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