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Vol. 72, No. 7, July 1999 |
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Are Your Independent Contractors
Truly Independent?
Training. Independent contractors should be workers who neither
need nor receive periodic or ongoing training from a particular
company. Such training, if provided, indicates an employer-employee
relationship. Moreover, if a company pays to train a worker through
a third party, such as paying for professional development courses,
an employer-employee relationship generally will be found. However,
companies commonly provide some limited training to independent
contractors, such as general orientation information or information
on new product lines. Again, as with the instruction provided,
the more detailed and comprehensive the training provided, the
more likely it is that control exists.
Financial Control
Financial control refers to whether a company has the ability
to direct or control the economic or business aspects of the
worker's activities. Factors to determine whether financial
control exists are: significant investment, unreimbursed expenses,
services available to others, opportunity for profit or loss,
and method of payment.
Significant
Investment. Workers who purchase, rent, or lease their own
equipment or office space to perform a particular job are more
likely to be independent contractors, whereas employees generally
have equipment and office space provided to them by their employers.
Unreimbursed Expenses. Workers who pay for their own
supplies generally are independent contractors. Workers who receive
such materials from the company, or who have such costs reimbursed,
are likely to be employees.
Services Available to Others. Workers marketing their
services to the public are likely to be independent contractors.
Although employees who "moonlight" may have more than
one employer, workers with a regular practice of working for
different companies generally will be labeled independent contractors.
This is particularly true if a worker provides services to competing
companies in the same field, and even more so if a company has
a policy prohibiting its employees from providing services to
competitors.
Opportunity for Profit or Loss. If the worker makes
decisions affecting his or her bottom line, the worker likely
has the opportunity for a profit or loss, and will be considered
an independent contractor. Examples of decisions that may affect
a worker's bottom line include the type and quantity of
inventory to purchase, the amount of capital investment, and
where and whether to purchase supplies or equipment.
Method of Payment. Generally, compensation by the hour,
day, or week is evidence of an employer-employee relationship,
while payment of a flat fee is evidence of independent contractor
status.
Relationship of the Parties
The final category of evidence examines what the parties
intend their relationship to be. It must be emphasized that the
parties' intent, while persuasive, is not controlling. Even
if both parties agree in writing that an independent contractor
relationship exists, a court or the government could find otherwise.
A written agreement setting forth the terms of the independent
contractor relationship is one of the clearest indicators of
the parties' intent. Similarly, the worker's incorporation
of his or her business, even if the worker is a sole proprietor,
demonstrates an intent to be independent. Moreover, the exclusion
of a worker from employee benefit plans and the provision of
a Form 1099 rather than a Form W-2 demonstrate the parties'
intent to create an independent contractor relationship.
In addition, the terms and length of the relationship may
be important factors. A company's absolute right to terminate
the worker without penalty, and a worker's right to quit,
are generally evidence of an at-will employer-employee relationship.
Conversely, an independent contractor relationship generally
can be terminated only subject to certain limitations, sometimes
including payment of a penalty. Moreover, independent contractor
relationships generally exist for a definite term. The longer
and more indefinite the term of the relationship, the more likely
that an employer-employee relationship will be found.
Finally, if the work performed by the worker is part of a
company's integral business activity, it is likely that
the worker is an employee. "Integral" in this context
means that the work or project is part of the business's
regularly conducted activity. For example, a store may retain
workers to install electricity and plumbing in its building.
This work, while necessary to the functioning of the store, is
not the store's regular business activity. These workers
are independent contractors.
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Jordan W. Siev and Kirsten M. Eriksson are members
of the New York office of Anderson Kill & Olick P.C., whose
practice includes representing companies and fiduciaries in matters
involving the employee/independent contractor distinction.
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Some companies believe they can eliminate the problems created
by this issue by hiring their independent contractors through
a temporary help agency. This is only partly true. If the temporary
agency is no more than a shell with which the worker has little
or no contact, and the trappings of an employee-employer relationship
exist between the worker and the company, the relationship with
the temporary agency may be disregarded.1 To prevent this result,
the company should not recruit specific workers, but should use
whatever workers are provided by the agency. The company should
not train the workers extensively, and should not use the same
workers for an extended period. Finally, the workers should not
be given additional tasks or projects that go beyond their original
assignments.
Conclusion
The use of independent contractors can be a valuable way for
companies to decrease costs. However, the use of independent
contractors is not without its dangers. Companies must be careful
to ensure they do not run afoul of the law and misclassify employees
as independent contractors. Companies should scrutinize their
practices following the above guidelines, periodically audit
their independent contractor relationships, and consult with
a professional about any concerns of misclassifying independent
contractors.
Endnotes
1 See, e.g., Vizcaino v. U.S. District Court
for the Western District of Washington, 1999 U.S. App. Lexis
9057 (9th Cir. May 12, 1999) (later proceeding in Microsoft
holding that Microsoft can still be employer of workers from
temporary agency).
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